Coal news and updates

Government approves coal block bidding method

November 25: The government has given its seal of approval on the bidding methodology, selection criteria and method for fixing the floor/reserve price for auctioning of coal blocks.

There will be a production-linked payment, whereby the bids will be invited on the basis of a production-linked multiple, an official of Ministry of Coal said.

The official further said that the bidder that quotes the highest multiple will become the preferred bidder and the floor price in this case will be a floor multiple that is set prior to the bidding and the latter is required to quote above the floor multiple.

The same auction methodology would be applicable for explored as well as upgraded regionally explored blocks. A basic upfront payment would be prescribed to ensure that the winning bidder has a minimum commitment to develop the block from the start. This amount would be kept equal to 10% of the intrinsic value of the coal block.

In addition, Rs/ton bidding (with yearly escalation linked the weighted price index) would be the criteria for auction of both explored and regionally explored blocks (where data and analysis have been upgraded by CMPDIL), according to the official.

For setting the floor price, first, the intrinsic value of the block will be obtained by computing its present net value (PNV) based on a discounted cash flow approach. Then, any discounts to be given are factored in (as fixed by the government) by reducing the PNV accordingly.

The final PNV (after discounting and subtracting the basic upfront payment received from the bidder) is then proposed to be annualised to become equal to a Rs/ton number.

For setting the reserve price for allotment of blocks to government companies, the reserve price in Rs/ton would be determined using the DCF valuation method once the detailed exploration has been carried out by the coal block allocattee.

When the mine plan is approved, by the government, the reserve Rs/ton multiple can be determined as per the same methods used for arriving at the floor price.

For setting the reserve price for coal blocks to be allotted through tariff-based bidding, the reserve price (Rs/ton) to be paid per annum may be determined once the detailed exploration has been carried out or the block has been upgraded by CMPDIL.

The reserve price multiple may be determined by using the DCF valuation method and factoring any discount that the government may prescribe. The reserve price in such cases should be limited to 10% of the intrinsic value arrived at to ensure that power generation costs are kept low.