Home >industry >energy >Coal India chief sceptical about foreign takeovers

Kolkata: Even as the Union government piles up pressure on Coal India Ltd (CIL) to deploy its surplus cash to acquire mines abroad, chairman S. Narsing Rao says incremental resources may not measure up to justify the management time and risks involved in foreign takeovers.

An operating mine yielding 20 million tonnes (mt) of coal a year could be a huge asset for a small miner, but for CIL it only means 15 days of production, he said, explaining his scepticism. “But yes, the government wants us to look outside India to expand our resources," Rao said in an interview.

CIL is exploring 10-12 overseas investment proposals, mostly minority stakes, according to Rao. Pratik Patil, junior minister for coal, had said in March replying to a question in the Rajya Sabha that the state-owned miner had put aside 25,000 crore for foreign acquisitions till 2017.

Buyouts are fraught with risks. A special purpose vehicle (SPV) founded by Indian state-owned firms to buy foreign assets had almost submitted a bid in 2010 for an overrated African coal mine.

There was “considerable pressure" from the government on International Coal Ventures Pvt. Ltd (ICVL) to bid for Australia’s Riversdale Mining Ltd, recalls a former director of the SPV, who did not want to be named.

Rio Tinto Group, which in 2011 bought the Australian firm for $4.1 billion (around 24,600 crore today), for its coal resources in Mozambique, had to write down the asset by $3 billion in less than two years because recoverable coal was found to be far short of initial estimates.

Rio Tinto’s two officials, Tom Albanese and Doug Ritchie, who spearheaded the purchase, had to step down.

ICVL did not eventually bid for Riversdale. Tata Steel Ltd, which owned 26% in the firm, also sold out to Rio Tinto two years ago, making a 100% gain from the investment in the Australian firm in four years.

Even as it tries to live up to the government’s expectations, CIL has to “cautiously evaluate if the incremental resources that an acquisition brings are worth the efforts", Rao said, adding that decisions on acquisitions have to be taken fast. “Or else, they don’t materialize at all."

The state-owned miner is currently evaluating a proposal to acquire a 50% stake in two mines in Australia. These currently produce 15 mt, but their output can be scaled up, according to Rao. All the other proposals are for minority stakes.

CIL, which has a cash reserve of 62,000 crore, or a little over $10 billion, is seeking advice from the investment banking arms of three financial services firms: BNP Paribas, Standard Chartered and Barclays.

But for now, at least, the firm appears to be focusing on shoring up domestic production. The target for the current year is 492 mt.

It is time the miner must decide what it wishes to be in the long run, thinking beyond the medium term, say experts.

It’s a question of whether Coal India wishes to establish itself as a global supplier of coal, said Partha S. Bhattacharyya, the firm’s former chairman. “It has the cash to be one, but it is a matter of strategy," he added.

If CIL’s management is of the view that it does not immediately have the capabilities to acquire overseas assets, it is bound to be sceptical, said Arvind Mahajan, executive director at consulting firm KPMG.

CIL has already made a small beginning. Its arm Coal Videsh, launched in 2009, has secured a five-year licence to explore and develop mines in Mozambique. More recently, it entered into an agreement with a provincial government in South Africa to explore coal mining potentials in the country’s Limpopo region.

But some independent directors of Coal India have questioned the financial viability of the South African project, according to an official who declined to be named.

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