Mumbai: India’s biggest electricity generator outside state control, Tata Power Co. Ltd, may face difficulties repaying $850 million (Rs4,412 crore) debt used to buy stakes in two Indonesian mines as coal prices decline, analysts said.
A slide in thermal coal prices to the lowest in eight months may cut Tata’s dividend from PT Bumi Resources Tbk, affecting its ability to pay debt, said Shruti Mehta, Mumbai-based analyst at Finquest Securities Pvt. Ltd.
Tata Power said if coal prices remain below $60-65 a tonne, it may put pressure on loan servicing, although it expects prices to remain above this level.
“Benchmark Australian coal prices have fallen in the last few days,” said Mehta. “Indonesian coal trades at even lower prices and this may hurt Tata Power’s dividend earnings from Bumi this year and affect their debt repayment.”
Power station coal prices at Australia’s Newcastle port, a benchmark for Asia, last week declined 14% to $65.32 a tonne, the lowest level since the week ended 15 June, according to the globalCOAL Newcastle Index.
Declining demand for coal has prompted producers in Australia and South Africa to curb production.
“Tata Power doesn’t expect to have difficulties repaying loans as coal prices are expected to stay above $70-72 a tonne,” the company said in a statement on Wednesday in response to emailed questions from Bloomberg.
Since many existing coal contracts were priced in the last three-six months, if the coal prices remain below $60-65 for the next six months, it may put pressure on servicing of the loans taken at our investment subsidiary level for the acquisition of interest in Indonesian coal mines, Tata Power said.
However, experts’ views are that in the medium term, coal prices will remain at $70-72 levels and not fall below that.
Tata Power agreed to pay $1.3 billion in March 2007 to buy a 30% stake in two coal mining units owned by Bumi, Asia’s third biggest coal producer. The agreement entitled the company to purchase 10 million tonnes of coal, securing supplies of the fuel for its power plants in India.
Bumi paid Tata Power $220 million as dividend for its 30% stake in 2008, JM Financial Institutional Securities Pvt. Ltd said on Tuesday.
“We estimate Tata Power’s share of dividends in calendar year 2009 to fall to $170 million,” JM’s analysts Abhishek Puri and Kashish Tandon said in a note to clients on Tuesday. Tata Power needs to pay $175 million a year, with an interest payment of $45 million.
“Given the fall in coal prices, we think it will be difficult for Tata Power to service the $850 million debt used for acquiring the mining assets,” Finquest’s Mehta said.