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Lanco Infratech believes Australian coal asset will yield reasonable returns

Lanco InfratechBSE 0.81 % believes its Australian coal asset remains viable and will yield "reasonable returns" on investment although some analysts are questioning the viability of the project.

Lanco's Griffin reported an operating loss of Aus$24.5 million in the first half of 2014, when output fell 9 per cent. Although Australian government has extended support to the project, analysts are concerned about the fall in coal prices and the parent company's huge debt.

However, Lanco believes the project will still give reasonable returns. "The price of coal has declined significantly since 2011 when Lanco acquired the asset.

However, coal is projected to remain an important energy source and as per the medium to long price projection by various expert firms, the export project remains viable with reasonable return on the investment," a company spokesperson told ET.

Lanco has recently said that it may divest its Australian coal asset but it may not be able to get very good valuation as the Australian benchmark thermal coal price has halved in the past three years, which analysts say has changed the economics of the mining project and the associated infrastructure.

Australasia Institute for Energy Economics and Financial Analysis (IEEFA) said in a report named 'The Imminent Failure of Lanco
Infratech's Investment in Griffin Coal' that the project is headed towards "insolvency". "IEEFA views Lanco Infratech's Australian Griffin
Coal as a potentially stranded asset. Being overgeared and loss-making at the gross cash operating level, the current business viability is questionable," said Tim Buckley, director of energy finance studies, IEEFA. drawn based on assumptions without checking the facts with company," Lanco said.

Lanco also dismissed the report stating Buckley, the financial analyst, has financial interest in few renewable companies. Buckley said Lanco was "trying to distract from the key points."

"We acquired the mine for Aus$750 million and with interest, it amounts to Aus$1 billion. Given that we plan to extract 400 million ton from the mines, we will require $2.5 per ton of margin to meet the acquisition cost and another $5-6 to meet capex cost. The report states that Griffin will face insolvency in 2015 based on the premise that it doesn't have resource to make payment of $150 million due, but that is not true as the payment is fully funded.," Lanco's spokesperson said.

In 2011, Lanco Infra acquired the Griffin Coal in Collie, West Australia for Aus $750 million. Although the mine's operations and financials were in poor shape, Lanco believed that with an investment of Aus$1 billion it could turn around the business and expand production from the mine which has reserves of 1.1 billion tonnes. "Given the parent company's US$6 billion of consolidated net debt, the corporate debt restructuring program under way in India, plus the continued gross operating losses of Griffin Coal and the A$150 million final payment due to the Australian creditors in February 2015, it seems of questionable merit for directors to allow this group to continue to make such claims," Buckley said.

However, Lanco said that the payment of Aus$150 million that is due in February is fully funded. "The requirement for capex funding is still a little away (at least 18 months) which will be tied up at an appropriate time (as it is not required at this stage)," Lanco said.

Source: Economic Times