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Winning of coal blocks is structurally positive

Event

JSPL has won four thermal coal blocks in the recent auction. The combined mining capacity of the mines is ~15mtpa (can be expanded to ~17mtpa) which will make JSPL 100% self-sufficient in thermal coal and is back to pre-FY14 era, albeit at higher cost.

Details

The four mines won by JSPL are Utkal C (capacity of 3.3mtpa, expandable to 5mtpa @45% premium, if used in coal gasification, premium will be 22.5%), Utkal B1 & B2 (capacity of 7.7mtpa @15.25% premium) at Odisha and Gare Palma IV/6 (capacity of 4mtpa @85.25% premium) at Chhattisgarh. The combined resources of the four mines are ~665mt and total mining capacity of ~15mtpa, enough for 30+years. The weighted average premium is 35.5%.

Utkal B1 mine was earlier held by JSPL (before FY14) at which it based its coal gasification based DRI plant at Angul. With majority of the approvals in place, we expect this mine to be operational by FY23-end and others in FY24. The Odisha group of mines are 5-15kms from Angul plant while Gare Palma IV/6 is ~45kms from Raigarh plant.

Impact

At ~9mt steel production, JSPL will require ~11mt thermal coal for its DRI plant and captive power plants. It sources ~5mt coal via linkage from Coal India while ~5.5mt comes from e-auction and ~0.5mt from imports. With expanded capacity at Angul, it will require ~17mt of coal.

Currently, landed cost of linkage coal is Rs2,600-3,000/t while e-auction coal is ~Rs5,000/t. Our calculation suggest that landed cost of coal from Utkal mines should be Rs1,150-1,400/t while it should be ~Rs2,800/t from Gare Palma IV/6

In the initial years of coal mining, JSPL should replace e-auction coal from its captive mines and will be ~100% captive by the time Angul expansion comes in. Assuming average e-auction price to be ~30% premium to linkage coal, JSPL can save atleast ~Rs1,770/t on coal (at current e-auction price, it can save ~Rs3,340/t) and can save ~Rs1,050/t on linkage coal. As a result, at peak capacity of 17mt, it can save ~Rs26bn/year (assuming saving of Rs1,045/t on 5mt linkage coal and saving of Rs1,767/t on e-auction coal for 12mt).

Coal mining to enhance share value by Rs143/share at peak capacity

JSPL’s winning of coal blocks is a long term positive for the company. This not only provides assured supply but is also financially remunerative. Though we have not included the benefits of captive coal yet (will do so with progress happening in next two quarters), our calculation implies that this can positively affect the fair value by Rs143/share at peak capacity. We reiterate our positive view on JSPL with target price of Rs674 (earlier Rs659), rolling over to FY24 numbers. Our TP is based on 5.5x FY24E EV/EBITDA. Reiterate BUY.

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