Commercial coal mining: First steps taken, long way to go
The Government offered 41 coal blocks on auction with a peak output of 225mt, c.15% of domestic coal production by FY26. Expected investment in these mines is Rs330bn. With no end-use restriction (including exports), the government removed all conditions except for the payment of upfront fee and revenue sharing. However, the response remains lackluster. Out of 38 mines that were finally put on block (Exhibit 7), technical bids have been received for only 23 mines (Exhibit 11). 15 mines received no bids (Exhibit 12) and 4 mines have received single bid which is likely to be cancelled. We note that, out of 17bn tonnes of coal resources offered, the likely eligible bids will be only for 3.1bn tonnes (assuming the three single bids are also excluded) - a paltry 18%.
* History of e-auctions of captive coal mines is not encouraging: In August 2014, when the Supreme Court cancelled the allocation of 204 coal blocks on various grounds, 45 of them were operational. The government enacted Coal Mines (Special Provisions) Act 2015 to e-auction mines on a transparent basis. As a result of the ensuing process, the government auctioned 33 mines, of which 9 were subsequently cancelled and only 22 remain allotted. Of these, only 11 are producing mines now.
* Mines put up for auction without visibility on clearances: We note that out of 17bn tonnes of coal resources offered through 38 mines, only 1 mine with 61mn tonnes of reserves has all clearances (including partial EC clearance), which has no takers (Exhibit 13). For all other mines, one or the other approvals are missing including Environment Clearance, Forest clearance, mining plan, and mine closure plan. We believe the government should look into a fast-track approval to expedite the mining process.
* Simplified bidding process: The government has lowered the minimum bid for the coal block to 4% (vs. 10% in the case of iron ore mines) with incremental bids of 0.5% up to 10% and 0.25% thereafter. Upfront payment has also been capped for mines with lower geological reserves. The upfront payment shall be calculated at 0.25% of the value of geological reserves and capped at Rs1bn for geological reserves of up to 200mt and Rs5bn for geological reserves more than 200mt.
* Way forward is not easy: The next round of process is the evaluation of the technical bids followed by e-auction for qualified bidders between 19th Oct and 9th Nov, culminating into issuance of vesting order within 50 days of declaration of successful bidder. Thereafter, the successful bidders will start their journey of obtaining EC/FC/other regulatory clearance, land acquisition, R&R process, which are all time bound milestones before finally first coal is mined. We believe this will take anywhere between 4-6 years unless the government fast-tracks the process. We also note that commercial coal mining is not just about mining, it is also about logistics and evacuation of coal and its dependence on Indian Railways also, which is also critical for the success of commercial coal mining.
* Winner: Coal India (CIL) has a target to increase production from 602mt in FY20 to 1,000mt by FY25, which we believe is a tall order. However, with increasing capacity of renewables and higher production from CIL, we believe commercial coal mining will remain a small subset of the total coal mining sector in India with CIL continuing with its overarching presence. The total capex, gestation period to production, plethora of regulatory clearances, poor evacuation infrastructure and cumbersome R&R process shall all make commercial coal mining less attractive. We maintain Buy on CIL with a TP of Rs208 based on 5x FY22E EV/EBITDA. The dividend yield of 9.6%/12.2% in FY22/23E provides additional comfort.
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