Coal news and updates

Street seeks clarity on coal block auctions

Analysts believe total cost of production at Rs 1,000/tonne reasonable for power firms

The speed with which the government announced the draft guidelines on coal allocations has been impressive. By introducing the end-use clause for applicants for Schedule II (42 operational coal blocks) and Schedule III mines (32 blocks which are near producing), the government wants to reserve these for players with end-use for coal and have already invested in the projects. To bid for the operational Schedule II mines, players should have invested 80 per cent in the project, and for Schedule III mines, an investment of 60 per cent of the project cost should have been made.

Of the affected companies, analysts believe, Hindalco stands to benefit as it might retain its blocks. Axis Capital believes Hindalco has a good chance to retain the block for Talabira, given its logistical advantage. For Mahan, the brokerage believes, Hindalco has a reasonable chance of retaining it as it is reserved for end-users and also has completed the entire capex. And, in case an existing coal block owner loses the mine, the nominated authority will decide on the compensation to be paid based on written down value of assets and infrastructure.

The Street is speculating on how the government will arrive at the reserve price, which would determine the aggression with which companies will bid for the mines. Analysts do not expect the power utilities to aggressively bid but steel and cement companies could, as there is a wide differential between prices of coal in the e-auction and that from captive sources. Emkay Global says: "Assuming a base price of Rs 295 per tonne, similar to the penalty imposed earlier, the total cost of production works out at Rs 1,000 per tonne, which we believe, is reasonable for power companies. Anything higher than that may be a worry, though some respite is also likely due to adjustment of state levy."

Analysts expect competitive intensity in the Schedule I mines to intensify as power projects, which are based on competitive bidding, can also seek allotment of these. A captive power producer can bid aggressively, as the coal they buy from e-auctions is more expensive than from captive mines. Edelweiss Securities says though the draft is a step forward in the auction process, key questions remain unanswered. First, the reserve price methodology for bidding and, second, whether any differential floor price for power and non-power bidders will be applicable.

Source: Business Standard