Coal mine auction presents opportunity for smaller firms

Mumbai: India’s first auction of coal mines has presented an opportunity for smaller regional companies that have grabbed the opportunity, and some mines, although analysts question the ability of some of them to pay up the huge amounts they have bid.

On Monday, bids for the Lohari block closed at Rs.2,438 per tonne, the highest bid made in the second round of auctions of so-called Schedule III category coal mines (those ready to produce but underdeveloped, with even the land having to be acquired in some cases). This bid came from a relatively unknown company, Araanya Mines Pvt. Ltd. Mint could not independently ascertain the provenance of Araanya Mines or contact it.

Sunflag Iron and Steel Co. Ltd, OCL Iron and Steel Ltd, Indrajit Power Pvt. Ltd and Trimula Industries Ltd are other relatively lesser known companies that have won blocks in the ongoing coal mine auctions.

“I am not surprised to see the smaller companies taking advantage of a more transparent process, compared to the earlier arbitrary process,” said a director tracking metals for a ratings agency, speaking on the condition of anonymity because he is not allowed to comment on individual companies.

Sunflag Iron and Steel operates a 360,000 tonne steel plant in Bhandara, Maharashtra. The company won the Belgaon coal block for Rs.1,785 per tonne. This block was earlier allotted to Sunflag, before the Supreme Court, citing irregularities in the process as highlighted by a Comptroller and Auditor General report, scrapped the allotment of 204 mines in September 2014. Sunflag fought off larger companies Bharat Aluminium Co. Ltd Ltd and Reliance Cement Co Pvt. Ltd for the block.

OCL Iron and Steel operates a direct reduced iron (DRI) plant in Rajganjpur, Odisha, and plans to set up a 0.7 million tonne per annum steel plant in Kutnia in the same state, according to the company’s website. OCL won the Ardhagram coal block in Odisha for Rs.2,302 per tonne.

Some regional companies see the auctions as the perfect opportunity to secure fuel and reduce dependence on Coal India Ltd.

“This coal block would mean cheaper coal compared to what we source through linkage agreements with Coal India Ltd. In addition, it helps us to plan our expansions better with an assured coal supply,” said an official from one the small companies, who asked that neither he nor his company be identified.

Madhya Pradesh-based Trimula Industries has committed to pay Rs.727 per tonne of coal mined from the Meral block to the Jharkhand government.

“Trimula Industries has won this block at a very attractive price for its high-grade coal content. The only challenge is on the land acquisition side and it may involve a high mining cost, which the company would have taken into consideration,” said an analyst with a domestic brokerage firm, who did not want to be identified as he is not authorized to talk to the media.

Indrajit Power has an operational power plant of 85 megawatts (MW) capacity in Wardha, Maharashtra, and plans to add another 100MW of capacity in a phased manner, according to the company’s website. It has committed to pay Rs.660 for every tonne of coal mined from the Nerad Malegaon coal block to the Maharashtra government. The Nerad Malegaon block has an annual rated capacity of 0.4 million tonnes and would cater to the entire 85MW power generation fuel needs.

Annually, Indrajit Power will have to pay Rs.26.4 crore, Trimula Industries Rs.29.08 crore, Sunflag Rs.53.55 crore, and OCL Rs.92.08 crore.

“Whether these companies will manage to pay what they have committed is the key question, but then, the payment is also spread over a large period of time and at par with imported coal costs,” added the analyst.

Sunflag’s annual net profit for financial year 2013-2014 was Rs.21.68 crore, less than half of the annual royalty payment. OCL reported a net loss of Rs.11.35 crore in the financial year 2013- 2014 at the consolidated level.

Spokespersons for OCL Iron and Steel and Sunflag Iron could not be reached for comment. Financial details for Indrajit Power and Trimula Industries are not publicly disclosed.

“It is too early to say how we plan to fund the financial requirements of this block. We have just won it, the remaining details will have to be finalized now,” added the official from one of the small companies.

While the companies will only pay the royalty once they start mining the coal, they have to pay other charges (such as transaction charges) immediately.