Coal news and updates

Companies bidding for coal blocks in India may end up paying thousands of crore in upfront payment to the government, which starts the process to auction 74 coal blocks next month. The allotments will happen by March. The government will share details about the auction by 22 December, but analysts expect the base price will be based on the cost of unmined coal in India, with a premium for private companies that sell end-products at global rates and a discount for power and state-owned firms. “The valuation of $1-3/tonne of reserves (unmined coal) is derived by calculating the net present value (NPV) of profits of a coal mine,” said Rakesh Arora, managing director and head of research at Macquarie Capital Securities (India) Pvt. Ltd. “The range comes due to various possible coal price assumptions like Coal India’s price or the e-auction price or the imported coal price,” Arora added. By Arora’s assumptions, the NPV of an important mine, Gare Palma IV/1 in Chhattisgarh that belonged to Jindal Steel and Power Ltd (JSPL) before the Supreme Court in September cancelled more than 200 blocks allotted to companies between 1993 and 2010, would be Rs.2,306 crore. The mine’s reserves are 124 million tonnes (mt). The NPV of Mahan coal block in Madhya Pradesh, that belonged to Essar Power Ltd and Hindalco Industries Ltd, would be Rs.2,682.1 crore for its 144.2 mt reserves. And the NPV of Tokisud North block in Jharkhand with 92.3mt reserves, and which belonged to GVK Power and Infrastructure Ltd, would be Rs.1,716.8 crore. Assuming the rules for bidding expected next month would seek a 10% upfront payment, and assuming that companies that have made investments in developing their mines wish to re-acquire them, JSPL may have to pay Rs.231 crore, Essar and Hindalco Rs.268.21 crore and GVK Power about Rs.171.68 crore. None of these companies wished to comment. Analysts said companies that sell their final product at commercial rates will likely have to pay a premium benchmarked at prices of international coal that could be 2.5 or 3 times higher than $1-3/ tonne. These could primarily be metal and cement producers. “Broadly my expectation is that 10% of the NPV will have to be paid upfront, following which there will be a royalty-based bidding,” said another analyst, who asked not to be named. The royalty bids could start at a little over the 14% companies are currently paying. Eventually, when all 204 blocks are put up for auction, their total reserves of 43.35 billion tonnes could be valued at a minimum of Rs.8.06 trillion and an upfront payment of 10% of that would come to Rs.80,600 crore.

 

“As the valuation of Gare IV/8 block has not been done till date, the company would not be able to comment of the valuation figure. However, the company would like to clarify that the 107.20 mt of coal reserves are the geological reserves (and extractable reserve is less than that)...” said a spokesperson for Jayaswal Neco Industries Ltd, that will be participating in the bids. “The estimated extractable coal for Gare Palma IV/8 block is only about 45 mt by underground and opencast mining methodology.” Funding issues? “It is premature to share (valuation figures) unless the ministry finalizes its methodology,” said Amitabh Mudgal, president, marketing and corporate affairs, Monnet Group, which will be bidding for the blocks it lost, including the Gare Palma IV/5 in Chhattisgarh. Companies such as Monnet have to pay a Rs.295 per tonne levy on a retrospective basis that was imposed by the Supreme Court’s order and may find it tough to meet the additional fund requirement for bidding for the blocks, analysts and a couple of company executives close to the bidding process said. The levy is on all the coal mined by the companies through the years from these mines. For instance, JSPL will have to pay about Rs.3,100 crore and Hindalco Rs.620 crore. Still, given the transparent process of allotting mines, banks will not have any compunctions about lending to companies that are allotted mines, analysts said. They add that the biggest beneficiaries of the auction will be power producers. “The surety of coal supply will de-risk the power projects, making it easier for banks to finance (them),” Macquarie’s Arora said. “The government is saying only 10% of the NPV has to be paid upfront and the rest on production… so not much of bank loans are required.” Monnet Ispat has filed a review petition with the Supreme Court to exempt the levy as a precondition for the bidding and also said the levy should have been exempted for its underground mine owing to the size of the investment. Other analysts said it is unlikely that the auctions will see very high competition due to logistics issues, as well as the surety that over 200 mines will eventually be auctioned. “Companies won’t bid irrationally as they know that in the run-up to March 2016, there would be enough blocks available to them,” said Giriraj Daga, senior research analyst at Nirmal Bang Equities Pvt Ltd. “There is also the logistics issue: companies with their end-use far away won’t bid for all blocks. For example, Sterlite or JSPL are unlikely to bid for Mahan block as their facilities are not close by.” If the original mine owners do not win back the mines, there might be a distress sale of their facilities that were originally linked to these. This could also jeopardize projects linked to these mines. “If there is no right of first refusal, the industry can see increased financial stress resulting in more mergers and acquisitions,” said Monnet’s Mudgal.“For instance, the companies that fail to get the blocks they owned earlier may have to make a distress sale of their plants linked to those blocks.” First right of refusal refers to a company that once owned a mine being allowed to match the winning bid for it. The government’s ordinance has not spelled out its stand on this.

 

 

 

Source: http://www.livemint.com/