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Business News/ Industry / Energy/  Who will bid for Mahan coal block? Essar or Hindalco?
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Who will bid for Mahan coal block? Essar or Hindalco?

Government may classify mines being auctioned out as 'power' or 'non-power', raising question of who can bid for crucial block

The government will likely categorize coal mines being auctioned out as ‘power’ and ‘non-power’, restricting their use exclusively to power companies or metals companies. Photo: BloombergPremium
The government will likely categorize coal mines being auctioned out as ‘power’ and ‘non-power’, restricting their use exclusively to power companies or metals companies. Photo: Bloomberg

Mumbai: Hindalco Industries Ltd and Essar Power Ltd are in a quandary over who between them will bid for the crucial Mahan coal block in Madhya Pradesh that a joint venture of the two companies previously held.

That’s because the government will likely categorize coal mines being auctioned out as “power" and “non-power", restricting their use exclusively to power companies or metals companies.

In 2006, Hindalco and Essar formed a joint venture, Mahan Coal Ltd, and agreed to share the coal from the block for their respective aluminium and power plants in the vicinity. The two went ahead and built their end-use plants even before the coal mine got full clearance. Both the end-use projects, Essar’s power plant and Hindalco’s aluminium plant, were constructed at a total investment of about 20,000 crore and started operations in 2013, according to the company website. Out of the targeted production, 5.1 million tonnes (mt) coal was to be supplied to Essar and 3.4 mt to Hindalco.

However, in the wake of the Supreme Court’s deallotment of 214 blocks including Mahan in September, the companies are now working out a future strategy, which will be discussed next week in a board meeting, an executive from one of the three companies said, not wishing to be named.

“The companies certainly are guessing what Mahan will be marked out for and thinking of the options they have," the executive said. “There are other blocks in the vicinity, but most of them were allotted earlier to state government companies."

An Aditya Birla Group spokesperson did not respond to an e-mail seeking comment. A spokesperson for Mahan declined comment. A spokesperson for Essar Power said the company did not wish to comment on the matter now.

The government is expected to start the process of allotting mines afresh on 22 December and has set a deadline of March for the final auction. Companies that were originally allotted mines and started work on end-use projects near these mines will likely try hard to reacquire these mines. The government has not barred these companies from bidding for the mines, although it has not indicated whether it will allow them a first right of refusal to match the highest bid and acquire the mine.

“There will be an end-use restriction in the mine dossier, so Hindalco or Essar will bid according to what Mahan has been specified for—power or non-power," Rahul Jain, vice-president, equity research at CIMB Securities (India) Pvt. Ltd, the local unit of a Malaysian bank and brokerage, said. “If it is earmarked for non-power, it will be a cakewalk for Hindalco."

According to Jain, if Hindalco loses the block, it can go for the swapping provision in the new rules, wherein it can bid for a block close to its other plants in Uttar Pradesh and Odisha and have the block closest to Mahan supply coal to it.

If Essar loses the block, it could sign a deal with Coal India Ltd, as the government has indicated it will facilitate and favour coal linkages for power plants.

Company executives said that Mahan coal block, with a targeted annual production of 8.5 mt, was a “good block" owing to its reserves and the progress it had made despite persistent roadblocks from environment activists such as Greenpeace.

“Most of the clearances are in place—the environment and forest clearance, the no objection certificate from the state pollution control board and the ground water authorities," said Ramakant Tiwari, chief executive officer of Mahan Coal.

“Only the final grant of the mining lease was awaited and if that would have come, we would have started mining...It is a block at a very advanced stage," Tiwari added.

According to a Macquarie Research report, under the ground coal in India is valued at $1-$3 a tonne, which puts the net present value of Mahan at 2,682.1 crore for its 144.2 mt geological reserves.

However, given the high valuation of the block, analysts said the companies may face liquidity issues in the bidding for it.

“Whatever they (Mahan Coal) have invested has been written off," CIMB’s Jain said.“Liquidity would be an issue as all the companies are neck-deep in debt and there is no free money out there. They may raise equity to fund the block purchase."

Hindalco had a debt of 64,695.16 crore at the end of March 2014 with a debt-to-equity ratio of 1.53. No recent data is available for debt of the unlisted Essar Power.

“If Hindalco loses the block, it would have to import coal or buy it locally—both options will make its operations unviable as the nearest port is far away and there is very little leeway with Coal India for linkages," said Dhananjay Sinha, head of research, institutional equity, at Emkay Global Financial Services Ltd. “So it would be a fairly big hit on its stock price."

Hindalco’s shares closed on the BSE at 169.15 on Wednesday, up 42.86% from a year ago, while the Sensex closed at 28,386.19 points, up 38.98% from last year. The BSE metal index closed at 11,274.31 points, up 23.53% from a year ago.

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Published: 27 Nov 2014, 12:37 AM IST
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