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Why state coal mining order is not a gamechanger

The decision by the central government to allow public sector undertakings to mine and sell coal to small and medium enterprises (SMEs) is unlikely to have any major impact on Coal India's volumes though it may reduce the country's dependence on coal imports. That is the view of Partha S Bhattacharya, former chairman of Coal India, who is apprehensive about how successful the move will be, and says the government should rope in professional mining companies to mine, instead of handing over blocks to companies whose core competence isn't mining. “State governments don’t have the necessary kind of expertise nor do they have companies which have core competency in mining. In all probability they will be inviting bids and hire someone working as mine development operator or contractors,” Bhattacharyya says. There is also limited possibility of this order impacting NTPC in any way, Bhattacharyya says. “NTPC had been given coal blocks 10 year back and they have 8-9 blocks with coal capacity of 1.5-2.0 billion tonnes. However, they have not mined any coal so far”, he says. Bhattarcharyya’s views were echoed by Chintan Mehta, Metal Analyst at Sunidhi Securities. Mehta pointed out that out of 34 operating mines auctioned in September 2014, only 9 have started operations yet and while these were expected to produce 40-50 million tonnes of coal, they have been able to produce just 9 million tonnes. This clearly indicates that the competency level is still low and there seems to be only a remote possibility that these mines will ramp up any time soon to pose much competition to Coal India volumes. Mehta, however, believes that Gujarat Mineral Development Corporation GMDC, which is currently into lignite mining, is possibly the only company that could benefit from this order. Below is the verbatim transcript of Partha S Bhattacharyya & Chintan Mehta’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Sonia: What could be the impact of cabinet decision?
Bhattacharyya: I don’t see too much of an impact because to my mind this is not possibly the best way of creating competition for Coal India. Firstly, the state governments don’t have the necessary kind of expertise or neither do they have companies which have sort of mining expertise or have core competence in mining. So, I am not sure, who are the agencies who are actually going to do the mining. So, in all probability they will be inviting bids and this will basically, it will hand it over to somebody for working as mine development operator so it will be a contractors. That will definitely raise more coal and to some extent it will meet the overall requirement of the country. However, whether this will lead to best in class mining coming up is a matter of doubt.

 Latha: You don’t think that there will be an impact on the volumes of Coal India?
Bhattacharyya: Not much because today we are importing 240 million tonne of coal so if at all something happens it will be to some extent reduced that; that is all that can happen.

 Latha: You don’t think that companies like NTPC have the capability of mining and selling coal?
 Bhattacharyya: NTPC has been giving blocks 10 years back. They are sitting on 8 or 9 blocks with a total mineable coal of more than 1.5 to 2 billion tonne. They have not produced a single tonne so far. So, I can’t vouch that NTPC has great competence. Mining is a specialised activity, it requires competence. Worldwide mining is not done by small agencies here and there and people mining their own coal requirement for end use, these are not the kind of things that happens globally. Globally coal mining is restricted to large companies and they are professional companies. They have the expertise in coal mining and that is what is an essential attribute for becoming successful in coal mining. It is not anybody’s job. However, these kinds of policies tend to consider that coal mining is just a sort of an excavating something and getting some coal that is not the way to do it.

Sonia: You must have just heard the management of Coal India where they did mentioned that there is not much of an impact on Coal India volumes but what do you think the impact on Coal India could be?
Mehta: Two things I would like to bring out –just draw back from September 2014 when Supreme Court cancelled the mines and 34 operating mines were auctioned. We have six to seven months down the line out of that nine mines have started operating. Those mines should have produced 40-50 million tonne; you have just got nine million tonne of coal mines. As per my knowledge goes 41 mines actually of that 204 coal blocks which were de-allocated were allocated to state enterprise earlier for commercial mining. So, it is a distinct thing that this mines will come up and ramp up. As the former guest also said it, it would cater to a small-scale demand which was earlier envisaged by the earlier government as well which never came on road from coal blocks in 1993. So, it is a long distinct possibility that this mine will start and challenge certain volumes of Coal India.

Sonia: What about NTPC, do you think NTPC as the capability of mining and selling coal and what would your view be on that if you do have one?
Mehta: I don’t actively cover NTPC so won’t be able to comment on that.

Latha: The point is that because of this news should there be a long-term bullishness some tailwind for NTPC or even for that matter Adani Entreprises which mines coal abroad. In future commercial mining will be opened even to private parties. It is too early to go too bullish on them?
 Mehta: Absolutely, as I said 41 mines which were allowed in 1993, forget about 1993, last one year we have not got 40-50 tonne from the mines which are already producing so getting a two or three years down these mines will start producing and altering then actually we will see the private miners come in. It will not be an easy game because they have bid for it. So, there are many if’s and but in this situation.

Latha: You still have a buy on Coal India?
A: I have a buy on Coal India no doubt about that, actually the current e-auction prices fall is not phenomenal of anything else. It is a factor of two things – the lower international prices and its stupendous volume growth of 10 percent offtake growth year-on-year. So, that has actually put pressure on e-auction prices rather than anything else. One company which comes into our radar will be Gujarat Mineral Development Corporation (GMDC) which actually is mining lignite in Gujarat. They are somewhere professional and enable to mine in a distinct possibility. That is the only company that comes in our radar even if it comes out.

source: http://www.moneycontrol.com