Published on 8/07/2020 12:07:47 PM | Source: ICICI Securities Ltd

Coal Sector Update By ICICI Securities

Posted in Broking Firm Views - Sector Report| #Mining Sector #Sector Report

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Coal mine auctions: Amove towards self-relianceandefficiency

Government of India has announced start of the much-awaited auction of 41 mineswith an estimated peak cumulative production capacity of 225mtpa by FY26. This is the first tranche of auctionsafter passing of the Mineral Laws (Amendment) Actin Mar’20, whichhad openedup commercial coal mining to the private sectorand removed end-use restrictions. Coal demand in the country was 954mntein FY20and is expected to increase by 4-5%p.a.,despite significant renewable capacity addition. The current auctions, along with investments by Coal India (CIL)to improveitsefficiency and ramp up production, will significantly help reduce India’s dependence on imports, which touched 247mnte in FY20(up from 235mnte in FY19) with an estimated forex outgo of >US$25bn.It may also make Indiaa net exporter in the long term.This, we believe,will strengthen CIL and make it more competitive and efficient as we expect coal demand to increase to FY30 (of which CIL will produce 0.9-1bnte).

* 41 coal blocks up for auction: In the firstround,41 coal blocksacross five states are up for auction (includingfour coking coal blocks). The blocks have a cumulative reserve of 16,979mnte and peak mining capacity is estimated at 225mtpa by FY26. Rs330bn is the estimated investment over next 5-7 years. These are some of the bettercoal mines on offer after cancellation of coal blocks by Supreme Court in 2014, since which only 29 blocks have been auctioned.Somemines already have good infrastructure while some have a few clearances/leases in place. The mines are a mix of underground and open castand fully/partially explored. Revenue sharing will be on ad-valorem basis instead of the earlier fixed price per tonne. Upfront amount has been reduced to only 0.25% of the value of estimated gross revenues(limited to a maximum of Rs5bn) while guarantee required is only up to 20% of upfront amount for fully explored and 25% of estimated expenditure for partially explored blocks. GoI estimates states to earn Rs200bn from these minesand create employment for ~0.3mn people.

Significant features and policy support to attract private/foreign investment: The Mineral Laws (Amendment) Act passed by Parliament in Mar’20 aims to make coal mining an attractive business for private investors(both domestic and foreign).It allowed participation of private players while removing end-use restrictions for the mined coal. Further, it allows transferability of ownership and concessionary rights, freedom to manage production schedule (100% of planned production is also allowed now) and revise mine plan, right to exploit CBM and minerals, and incentivises early production. Features of the current auctionalsoincludeoption to relinquish partially explored blocks, no exit barrier and allowing mortgage of mines for financing. Coal ministry has facilitated sharing ofresponsibilities for getting statutory approvals (an agency has already been hired to liaise with states/regulatory bodies) for the auctioned mines, which willsubstantially help auction winners to start production as early as possible.

* Private participation to co-exist with CIL: In FY20, India’sdemand for coal was 954mnte. Of this, CIL accountedfor 582mnte, SCCL 63mnteandcaptive production 63mnte, while the balance 247mnte coal was imported. Taking coal demand growth at 4%p.a., India’s demand is expected to reach 1.3-1.4bnte by FY30 (we expect coal to remain the dominant source of power generation in the medium term despite expected 200GW installedrenewable capacity). Even though this auction will result in peak production of 225mtpa by FY26, India’s aim of import substitution combined with growing domestic demand augurs well for CIL to retain its status as the key coal supplier, and possibly becomean exporter as well in the foreseeable future.


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