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CIL to reopen closed mines on a revenue sharing model

Move aimed at reducing coal shortage, while benefitting COAL

COAL has offered to re-open 20 previously closed/abandoned mines in partnership with the private sector. The methodology is the same as commercial mining. The mines will be auctioned on a revenue sharing basis.

The highest bidder can mine using green mining technology and can sell the coal at market prices under a transparent mechanism. Related-party transactions are not allowed.

The objective is to offer mines that are not commercially viable for COAL, but can be mined by the private sector. This will help reduce the coal deficit in India, which as per the Ministry of Coal is currently pegged ~25MT. If successful, COAL will offer an additional 100 mines.

A win-win situation for all, but the offering is too less

This scheme comes at a time when the power crisis in India is acute, and coal prices globally are substantially inflated. It is an opportune time for COAL to put these closed mines under the hammer. From the private sector, we expect higher revenue sharing bids for the mines that can be re-opened quickly, irrespective of their total reserves.

All underground mines on the block have a total annual production capacity of ~13MT (in some mines, individual production capacity has not been specified). The potential output of these mines can rise to 30MT.

Though the initiative is a good, we note that the total offering is too less in terms of existing production capacity to make a viable case for commercial mining for most of these mines.

The ministry has assured to extend all possible support to the private sector in opening these mines. It is willing to work on a solution, which is a win-win for both the government and the private sector

No immediate impact on COAL’s revenue/EBITDA; narrative is positive

The entire process will take time as the bidders will have to evaluate the current situation at the mines as some have been closed a decade ago. Hence, the immediate response should be measured.

The bidding is unlikely to be aggressive as these are underground mines, with a small annual output. The investment and timeframe for mining is yet to be ascertained with reasonable certainty.

Coal, as a commodity, is again in focus due to the Russia-Ukraine war and the impact on supplies of thermal coal from Russia. Also, a decision by Europe to structurally shift from natural gas supplied by Russia to other renewable sources, and increased dependence on coal during this transition has led to a massive spike in coal prices in our view.

This initiative will not lead to a change in our estimates for COAL for FY23/24, but the narrative of incremental earnings in the future is positive. We maintain Buy rating with an unchanged TP of INR220 based on 4x FY23E EV/EBITDA.

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