Sample this. Coal India, the much-reviled public sector coal behemoth, produced 462 mt of coal last year, with all the much-publicised legacy problems that it faces. The top seven global (private sector) mining giants together produced around 700 mt of coal last year (see Coal output by global players). And all of India´s private players produced a mere 50 mt of coal in 2014.

Ergo, to improve the country´s domestic coal production scenario, what is needed is more focused and ´serious´ players... and more support for the PSU coal giant. But what is the actual scenario?
By the time the issue reaches your hands, the government would have already started the e-auctioning process with 24 coal blocks on the platter, of which seven are dedicated to the power sector with a total coal reserve of 705 mt and likely to produce a mere 14.05 mt in the year 2015.

Now one must be surprised-with so much of coal reserve in place, what makes the government to have a miniscule output target? The seven coal blocks dedicated to the power sector were handled by private players, so certainly there is a cap imposed by the government in terms of excavation activity. Reason, they do not want the monopoly of India´s only focused miner - Coal India Ltd - to be broken by private players.

It is not a new revelation that India lacks in quality output of coal as well as mine productivity. What can be done to improve this scenario? Encouraging more competition in this space will be the only answer. But it should be transparent. Basically, (firms in) mining activity require two kinds of skill sets - companies should be good at acquiring land, environment clearances, negotiations etc., and also require professional mining expertise.

´At present the government focus has been on the first set of skill sets and, it has neglected the later one,´ feels Asheesh Sharma, Managing Director, MAHAGENCO.

If, questions Anil Razdan, Former Secretary, Ministry of Power, ´private participation is taking place through outsourcing in mining operations for Coal India, MDO, captive mining and JVs, then why not encourage private players to take up mining operation entirely?´
To this, another Former Power Secretary, P Umashankar observes that as there is no sense of competition, so CIL is not pushed to better efforts and greater efficiencies. Ergo, if the government really wants to move on, and to sort out the productivity, capability and quality of the coal, it should have a system where the preference is more for the second set of skills rather than the first one. If the government tries to move forward in this direction, a huge number of professional mining companies (global) will take part in the auctioning process, where India will get the best and expert miners to look after this critical resource of the country. And once the country has its natural resources in the hands of experts and professionals, the productivity (of the industry) and quality of coal produced in India will be world class.

Why focused miners?
Coming back to the issue of encouraging focused coal miners, the only solution at present is to invite international players with a possibility of JVs with those who will bag the new mines or wait until the third round of e-auctions which will have under-construction coal mines on the block. Why? Because, it will arrest the same probable situation of ´under production´ that the earlier miners had faced. In fact, some of the ex-power secretaries had openly wanted to break the monopoly of Coal India, which is the only ´focused miner´ at present.

Consider this: Globally focused coal mining companies like Switzerland-based Glencore Xtrata, Australian miner BHP Billiton, the British-Australian multinational Rio Tinto, Brazil´s Vale, the British-based Anglo American, China´s Shenhua Energy and the Australian headquartered Fortescue Metals Group´s cumulative output for the year 2014 was 683 mt. Importantly all these miners are private companies. Let´s have a comparative analysis of these global private miners with India´s private players who ´also mine´.

For example, Glencore Xtrata´s mining operations encompass over 150 mining and metallurgical sites around the world and it has output of 138.1 million tonnes of coal. Besides, Glencore, China´s Shenhua Energy´s output for the first ten months was 257.5 million tonnes.

Rio Tinto, the second biggest iron ore producer in the world, on the other hand has said that its share of thermal coal production is around 17.5 mt. Rio Tinto´s share of production of Australian hard coking coal and semi-soft coking coal is expected to be 7.4 mt and 3 mt, respectively. Brazilian multinational Vale´s output for the year ended 2014 was around 10 mt due to the strong performance of Carborough Downs, Moatize and Isaac Plains.

Meanwhile, adding contribution to the world´s total coal output is British coal miner Anglo American. The company´s total coal output for the year was 97.8 mt. The company has mines in South Africa, Chile and Brazil. Last but certainly not the least, the world´s tenth biggest coal miner Fortescue Metals Group with mines in Australia has an output of nearly 100 mt in 2013-14.

Meanwhile, Anil Swarup, Secretary, Ministry of Coal, government of India while talking to us during the 12th Construction World Awards suggested that the government has not set any deadline to commercially mine coal as it is uncertain when the actual digging will start. But he added that the government has made provisions for private firms to commercially mine coal. Ergo, according to experts, the decision will open the door to global giants like Rio Tinto and BHP Billiton and help ramp up output from India´s huge reserves - the world´s fifth biggest.

´Any company registered in India can bid (when a commercial coalfield auction takes place),´ says an official from the Ministry of Coal, preferring anonymity. ´So a foreign company registered in India can also bid, provided they fulfil other conditions.´

Opening up the industry will increase private coal production to about 400 mt by 2019 from less than 50 mt last year.

Where do Indian players stand?
The argument that POWER TODAY is bringing out with this comparative analysis is all these private (global) players with mines across 150 countries in the world are ´focused´ on only one particular activity, i.e., coal mining. Whereas in India, according to experts in the coal sector, players like Jindal Steel and Power Ltd, Adani Group, Tata Power, DB Power, Hindalco, Essar Power, and Sterlite Energy have diversified their business activities right from power, EPC and steel to mining.

We also took a look at these players´ mining output from the beginning till today to see how these private players stand as compared to focused global players. The total figures considered in the analysis were from the period 2008 to March 2014. As on March 31, 2014, the aggregate production from the coal blocks allocated to private and State sector power generating companies is estimated at 204.63 mt. To begin with, Hindalco´s total output was a mere 14.98 mt from its Talabira-I captive coal block allocated for the power sector. Whereas Jindal Power Ltd´s coal output from Gare Pelma IV/2 and IV/3 was 32.95 mt. Meanwhile, the lone runner in India´s coal mining activity, Coal India Ltd´s output for the period during April 2013 and January 2014 stood at 366 mt. Interestingly Coal India had missed the production target of 482 mt last fiscal, with an output of 462 mt.

To this, Bipin Kumar Saxena, Director - Marketing, Coal India explains that the company has been facing problems with respect to transportation of coal and has sought more rakes from Indian Railways to meet the off-take target. The 218 allocated captive coal blocks accounted for 16.7 per cent of India´s total geological reserves (geological reserves include proved, indicated and inferred reserves). However, the contribution to the annual domestic production has been much lower, and has remained at around 7 per cent in the past three years. As against the original target of achieving 104.08 mt coal production from captive blocks by the end of the 11th Plan, actual production was much lower at 36.17 mt only at the terminal year, increasing nominally to 38.88 mt in FY14.

After registering buoyant growth rates in captive coal production between FY07-FY10, production levels have stagnated from FY11 onwards. A total of 40 coal blocks were operational as at the end of FY14, which had contributed to 38.88 mt of annual production during FY14. In FY15, as per the Ministry of Coal´s provisional estimates, production from captive blocks is expected to increase to 52.93 mt (y-o-y increase by 36 per cent), supported by an increase in production from existing blocks, as well as operationalisation of six new blocks. This ramp-up is expected to increase the share of captive coal production to the total domestic production to 8.3 per cent in FY15, as against 6.9 per cent in FY14.

What´s missing?
Certainly, the rail linkages run right up to the pithead. Many coal consumers are not located at pitheads and therefore increasing demand for coal also translates into increasing need for coal transport. According to experts, the issue of rail linkage was mainly with captive coal miners because at the time of allocation of mines to the private players, Indian Railways did not concentrate on strong rail networks, since mining operations were privately held.

Now the main question that arises is, who should fund and build the rail linkage projects? ´Of course, it should be the captive mine owners, because while allocating mines it was a direction from the government itself,´ says Sunil Srivastava, Managing Director, Balaji Railroad Systems Ltd.

What went wrong?

Srivastava says that captive mine operators were reluctant to invest money in rail linkages as they felt that those who will get mines in the later part of the auctions will certainly have an advantage. These players would be able to use infrastructure without spending funds. This has made many private players back off from creating the much-needed infrastructure.

However, this can be solved if rail linkage projects can be undertaken on public-private partnership (PPP) model. Considering the amount of money involved, i.e., approximately Rs 250 crore for laying a 100 km rail line, the government should allow third party or private entities to create world-class infrastructure (rail line, storage system etc.,) in the vicinity of coal mines, and the coal miners can take the advantage by paying user fee charges. This will sort out the issue of rail linkage as well as storage system and will create enough opportunities for private players. To sort out the coal linkage issue, all captive mine owners who receive the mines after e-auction should form a special purpose vehicle (SPV), and invest the money on a cost-sharing basis.

But for this too, private players have refused to come together and form a unit to settle the linkages issue. Recently, when a Hyderabad-based private rail consultant went with a proposal to Adani Group to build a common rail linkage with another coal miner Indiabulls, Adani refused the proposal. At present, although Adani Group has received the necessary permission to lay around 100 km of rail line, the Indiabulls project has been stuck with the Ministry of Environment and Forests.

´This is a clear case of competition as one player does not want other players´ operations to start on time,´ a senior official from that rail consultancy told POWER TODAY. In a recent development, Adani has received approval for its $15.5 billion Carmichael coal and rail project in Australia. The expert from the consultancy feels that if Indian players can invest such massive amounts globally for securing coal supplies, they surely can look at building up Indian infrastructure and securing coal linkages with similar amounts of money.

Some may gain...
Private players like JSPL, were clearly one of the biggest losers when the Supreme Court, in September, held all coal mine allocations since 1993 illegal and withdrew their allocation to Indian companies. It lost around eight mines that were allocated to it. But an analysis of the potential outcome of the upcoming auction of these coal blocks by ICICI Securities finds JSPL may emerge one of the biggest winners and recover a lot of lost ground.

The ICICI Securities report divides the coal blocks on the basis of two end uses - independent power generation (meant for grid consumption) and everything else (including captive power for the concerned firms and other uses like making metals). The government intends to follow a reverse auction process for awarding coal blocks that are meant for independent power producers. This means that a reserve price would be set (based on Coal India prices for a parti¡cular grade of coal) and companies that bid the lowest below the floor price would get the blocks.

The report also states that companies that have low fixed costs per unit of power generation will benefit under this process, as they would have greater flexibility to bid lower and yet keep their power projects viable. On this criterion, JSPL is a front runner among firms. ´The possibility of reverse auction for power end use coal blocks is a significant positive for JSPL as it helps them to bid aggressively as the fixed costs are low,´ the report said. ´Also, being an incumbent JSPL is naturally placed to be the favoured party on technical competence.´

For instance, the ICICI Securities report compares the fixed price per unit of power generated by 10 companies who are expected to bid for the Gare Palma IV/2&3 block, located in Chhattisgarh, and which earlier belonged to JSPL.

At 48 paise per unit of power, JSPL has the lowest fixed cost and its closest competitor Sesa Sterlite would have a fixed cost of Rs 1.10 per unit, if it were to utilise coal from the same mine for power generation. ´JSPL can quote the lowest production-linked payment in the coal auctions and yet make a sustainable return on the back of this low fixed cost advantage while bidding for power purchase agreements,´ the report said. For other coal blocks that are meant for captive consumption, like Gare Palma IV/1 block, which also belonged to JSPL earlier, the rules would change. Here, the government will look for maximising its own revenues and companies would be expected to bid higher, depending on the economic value they expect to derive from these assets. Even in this scenario, the report finds JSPL may emerge a winner as its expected return on equity after using coal from this block looks better than its closest competitor, Bharat Aluminium Co Ltd (Balco) - a Sesa Sterlite subsidiary.

However, there may be a twist in the tale for the second block if the Odisha government agrees to Sesa Sterlite´s proposal to convert the end use of its 2,400 MW power plant in Jharsuguda to captive use for Balco´s aluminium business in the same State. If Sesa Sterlite can bid for this block as a captive consumer, the economics of the project changes and gives it an edge over JSPL, as the former´s expected return on equity would trump that of JSPL.

The brokerage also expects JSPL to be a frontrunner to acquire other coal blocks it lost in the auction, such as Utkal B1 in Odisha and if it can fend off competition from Sesa Sterlite for Gare Palma IV/1, it expects JSPL´s shares to perform better in FY16 and FY17, rising by 50 per cent from its current market price.

...some may lose
While there may be some wind¡fall gain for the Central government this fiscal from the additional levy imposed, six States´ finances would be affected by this ruling. West Bengal is likely to be the worst affected, as six operating coal blocks allocated to various State government companies have been cancelled. One operating coal block allotted to each State government company from Arunachal Pradesh, Karnataka, Madhya Pradesh, Punjab and Rajasthan has been cancelled. These State government companies now have to pay an additional levy on coal extracted by them.

According to the counsel of Coal Producers Associations, investment of Rs 2.87 lakh crore has already been made in 157 coal blocks (as at end-December 2012). At the same time the investments in plants (which use coal from these mines) is estimated at around Rs 4 lah crore.

To this, Sunil Kumar Sinha, Principal Economist, India Ratings & Research Pvt Ltd says, ´The banking and financial institutions´ exposure to these coal blocks is around Rs 2.5 lakh crore. The banking sector is already under stress, apart from comm¡ercial banks, Rural Electrification Corporation and Power Finance Corporation will also be impacted by the cancellation of coal blocks.´

But for bankers, PSUs and private players, e-auctioning may be a good opportunity to grab. Rakesh Singh, Group Head-Investment Banking, Capital and Commodity Markets, HDFC Bank Ltd is optimistic about the current development. According to his assessment, banks will look at the current development in the coal sector rather favourably because those who will bid and win the mines will get access to the natural resources. And he adds that this makes their operation less dependent on commodity price fluctuation.

Global practices
In terms of coal bidding activities, most of the experts that we approached are of the opinion that globally the best practice is to allocate mines directly to the best player in the respective country with the focus on mining activities but not to any fly-by-night player, in the way it has happened in India.

Rahul Jain, an analyst from CIMB Securities (India) says he was shaken when he heard the possible option of e-auctioning for the coal sector. According to him, the best practices to address the coal issue are through allocations only, but for that, the country must have specialised coal miners in the vicinity. Giving an example of other countries like Australia, South Africa, and Indonesia, Jain suggests a solution here. ´Give coal mines on an allocation basis and in return pay royalty to the government,´ he says.

But Singh from HDFC Bank Ltd is of the opinion that e-auction is a transparent way of doing business for natural resources. A Left-leaning intellectual has a theory: ´Monopoly PSUs are similar to a socialist government. There´s a single centre of gravity for the sector. If one fails, the entire sector fails.´ Hence it is important for India to diversify and not place all its eggs in just one coal basket.

Mined it!
Besides Hindalco, Tata Steel, Usha Martin, JSPL, Balco, Nalco, JSW Steel and Monnet Ispat will also lose their coal mines. These companies have heavily invested in these mines and the production was likely to start soon. These include Hindalco´s Mahan, Tata Steel´s Ganeshpur, Usha Martin´s Lohari, JSPL´s Jitpur Utkal B1, JSW Steel´s Rohne, Monnet Ispat´s Utkal B2, Nalco´s Utkal E and Balco´s Durgapur 2 coal blocks. Given the imposition of penalty by SC at the rate of Rs 295/mt of coal output from these mines, the aggregate liability on these operational projects is estimated at Rs 6,000 crore based on mining output till March 31, 2014, thus adversely affecting the operational projects in the private and State sector.

´In case of Talabira-I coal block, the cancellation shall have effect from 31 March 2015 subject to payment of an additional levy of Rs 295 per mt of coal extracted since beginning till 31 March 2015,´ says D Bhattacharya, Managing Director, Hindalco.

CIL is intending to purchase 250 additional rakes to evacuate more coal. The government is also to ensure completion of three ongoing critical rail projects which will increase output by 60 mt by 2017-18 and 200 mt by 2021-22. Coal linkage rationalisation is likely to result in saving on the transportation costs (linking the power plants to the nearest coal mines).

´Other government initiatives include automatic transfer of coal linkage of old plants which are more than 25 years old to the new plant, because new plants are having super critical technology to effectively use coal, and third party sampling of coal are other initiatives.´ said MK Goel, CMD, Power Finance Corporation to a question raised in an analyst conference.

Conclusion: How to resolve the issue
Encourage best-in-class mining players to join the coal sector, not fly-by-night operators.
Form JVs and SPVs which leverage on CIL´s strengths, with a view to bringing in adequate finance and also attracting the best technical expertise.
Bring in new benchmarks for productivity for already-allotted mines with clear timelines for the same.