Hindalco Industries Ltd. (HNDL), Essar Power and Jindal Steel & Power Ltd. (JSP), all run by Indian metal billionaires, risk losing coal permits for projects worth a combined $7.1 billion, if the nation’s top court accepts a government proposal to annul licenses for mines that haven’t yet started production.
Hindalco-Essar’s Mahan coal mine in the central state of Madhya Pradesh and Jindal Steel’s Utkal B1 mine in the eastern state of Odisha weren’t included in a list of 46 mines Attorney General Mukul Rohatgi proposed Sept. 1 should be allowed to continue operating. Some 172 permits should be cancelled, he said in a Supreme Court hearing then.
The court last week ruled illegal all 218 allocations since 1993 for so-called captive coal mines, mines which companies use for their own projects. Cancellations would raise costs for the projects, forcing them to run on more expensive coal bought at auctions or shipped from overseas.
“Losing captive mines will impact earnings at these projects,” said Rahul Jain, a Mumbai-based analyst with CIMB Securities India Pvt. “Things may turn worse in a commodity bear market.”
State-run NTPC Ltd., India’s largest electricity producer and biggest coal consumer, may lose nine out of 10 blocks allocated to it, undermining its plans to reduce imports at its plants.
Hindalco, controlled by billionaire Kumar Mangalam Birla, and Essar Power, run by billionaire brothers Shashi and Ravikant Ruia, have invested a combined $3.8 billion in power plants and an aluminum smelter to be fueled by coal from Mahan. Jindal Steel, controlled by India’s richest woman, Savitri Jindal, plans to use coal from the Utlak B1 mine to run its 200 billion-rupee ($3.3 billion) Angul steel plant, the country’s first to use thermal coal gas as fuel.
Production
Among mines where the government has proposed allowing mining to continue are Jindal Steel’s three Gare Palma mines in the central state of Chhattisgarh and Hindalco’s Talabira-1 mine in Odisha. NTPC Ltd.’s first coal mine in Pakri Barwadih in Jharkhand is also part of the list.
The coal ministry published the list of mines from which it wants to allow continued production on its website late on Sept. 1, without giving details on output.
The government is prepared to auction off new licenses for the cancelled mines, Rohatgi, the government’s top lawyer, said in his presentation to the Supreme Court in New Delhi. The court said “it was leaving its options open” and set Sept. 9 for a final hearing.
Auctions
The proposal aims to keep production going of the fuel that powers more than 60 percent of India’s generation capacity. State monopoly Coal India Ltd. (COAL), which produces more than 80 percent of the nation’s almost 568 million tons of annual output, has failed to keep pace with rising demand from power plants, steelmakers and cement plants, spurring rising imports from overseas.
“We should be careful of considering auctions as a solution for the natural-resources sector,” said Kameswara Rao, executive director for energy and utilities at PricewaterhouseCoopers LLP. “The sector is dominated by some large players, and an auction policy can discourage competition.”
Because the court ruled that all coal allocations were illegal, it wasn’t clear how the 46 mines could be given legal validity, Rao said.
Of the 46, 40 are already in operation and six are on the verge of starting.
Additional Royalty
The government suggested the court impose an additional royalty of 295 rupees ($4.87) a metric ton for coal that has already been taken from the operational mines.
India’s coal ministry in a July 3 list said it expects production of 53 million tons in the year to March 2015 from 42 captive coal blocks, including Hindalco, Jindal Steel, Reliance Power Ltd., CESC Ltd. (CESC) and Jaiprakash Associates Ltd. That’s about 9 percent of the nation’s total annual production of the fuel.
The updated list, which lists four additional mines, doesn’t give details of production. The ministry has sought details on production, investment and progress from the companies of the linked projects by today, according to the website.
Jindal Steel may have to pay about 25 billion rupees of additional royalty, while Hindalco may need to pay 8 billion rupees, if the government’s proposals are accepted by the court, said Prasad Baji, an analyst at Edelweiss Financial Services Ltd. in Mumbai.
Hindalco fell 0.7 percent to 174.85 rupees in Mumbai yesterday, while Jindal Steel declined 2.9 percent to 240.75 rupees.
India’s state auditor in 2012 found that allocating the mines to companies without an auction may have cost the government 1.86 trillion rupees, worth $33 billion at the time.
Source; Bloomberg