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Coal India: “Mining” the gains
Subtle improvement in business philosophy at ground level
The Indian power sector is reeling under tremendous pressure in terms of
domestic coal availability (38m tons of imports in FY10, ~9% of the fuel basket).
A recent report by the Planning Commission estimates possible imports of 100m
tons+ in FY12 for the power sector, ~20% of the total fuel basket. Global coal
prices have started moving up (RB index up 31% since April 2009), M&A
transactions are becoming expensive and coal availability is an issue worldwide.
In this backdrop, we met various business heads and senior management of Coal
India, and visited Jhanjra underground coal mines of Eastern Coalfields at Raniganj.
Production impacted by CEPI, inventories to aid growth in dispatches:
Coal India has indicated that production would be lower by 16m tons in FY11
and by 39m tons in FY12 due to the implementation of the Comprehensive
Environment Pollution Index (CEPI) norms. The initial production target for
FY12 was 520m tons, which was lowered to 486m tons in the mid-term
appraisal, given delays in forest clearances and further to 450m tons, given
CEPI. Lower production due to CEPI in FY12 will not impact dispatch growth in
the same proportion (expect 4-5% growth), given the large inventories.
Plans to drive e-auction volumes, prices remain firm: Coal India is
focusing on increasing e-auction volumes / MOU sales, thus extracting higher
profitability per ton of output. 1HFY11 e-auction prices are 73% higher than
notified prices and are one of the key drivers of profitability. Available stock
(production + inventory) can be diverted to e-auction route after meeting
obligations under FSA at 343m tons (at the trigger level) in FY11.
Meaningful washed coal volumes only post FY14E: A large part of
washery projects are in zones impacted by CEPI. If the imbroglio continues
beyond March 2011, the project awards could be delayed.
Visit to Jhanjra MIC underground mine
At the Jhanjra MIC mine, we went 263 meters under the ground and walked
~2km through extracted coal seams to see a 'continuous miner' in operation.
We passed through the Sonepur Bazari mines (open cast), which together
with Jhanjra mines contribute ~1% of Coal India's production but 5-6% of its
profitability. This is because a large part of the current output is being sold
through the MoU route at near import parity prices. There are plans to enhance
production 3x over the next three years, which will contribute meaningfully to
earnings growth. In our interactions across levels, phrases like 'large part of
the expansion through complete mechanization', 'increased outsourcing',
'improving profitability per ton', etc were repeated several times, indicating a
meaningful change in the way business is being conducted.
Expect earnings growth of 15% in FY11; staff cost to increase ~10%
Despite higher staff cost and lower dispatches, we expect 15% PAT growth in
FY11. We maintain Buy with a price target of Rs325, an upside of 8%.
Met business heads, expect ~15% earnings growth despite
near-term challenges
Production to be impacted by CEPI, large inventories to enable 4-5% growth
in dispatches
Coal India has indicated that production would be lower by 16m tons in FY11 and by
39m tons in FY12 due to the implementation of the Comprehensive Environment Pollution
Index (CEPI) norms.
CEPI is one of the key constraints for production and the current moratorium is applicable
till March 2011 (with a possibility of extension on review). Even if it is lifted in March
2011, the company will lose ~6 months in FY12 to gather momentum as clearances,
mobilization, etc will take some time.
In the worst case scenario of the moratorium continuing, production impact in FY12
will be 39m tons, entailing largely stable production volumes YoY. Eight coal fields have
been impacted by CEPI, comprising of 14 projects largely in Mahanadi, Singrauli, Orissa,
etc, with production capacity of 143m tons (of which 68m tons has got environmental
clearance). The initial production target for FY12 was 520m tons, which was lowered
to 486m tons in the mid-term appraisal, given delays in forest clearances and further to
450m tons, given CEPI.
The management estimates FY11 dispatches at 435m tons (up 4.8%), given opening
inventory of 63m tons as at FY10. This compares with 1HFY11 dispatch growth of
2.2% (198.5m tons) and implies 2HFY11 growth of 7.3% YoY (237m tons). It is also
marginally higher than our current estimate of 430.5m tons. Lower production due to
CEPI in FY12 will not impact dispatch growth in the same proportion (expect 4-5%
growth), given the large inventories.
Dispatch growth has been aided by higher rake availability - from 149 rakes/day in
1HFY10 to 157 rakes/day in 1HFY11, and then to 168 rakes/day, currently. Rake
availability is likely to improve to 180-185 rakes/day in 4QFY11. A rake/day entails
incremental volumes of 1.2m tons per annum. This will lead to higher despatches in
2HFY11. Also, the management indicated that FY12 production is being planned with
174 rakes/day as against an average of 164 rakes/day in FY11.
Plans to drive e-auction volumes, prices remain firm
Given the constraints in terms of evacuation infrastructure, Coal India is focusing on
increasing e-auction volumes. According to the management, FY11 e-auction volumes
are likely to be 11.7-12% of dispatches at ~50m tons - up from 45m tons in FY10.
1HFY11 e-auction prices are 73% higher than notified prices despite an average increase
of 7% in notified prices, as against 56% higher in FY10. E-auction prices are one of the
key drivers of profitability. Also, the management indicated that available stock
(production + inventory) can be diverted to e-auction route after meeting obligations
under FSA at 343m tons (at the trigger level) v/s our estimated sales of 368m tons
through the linkage route in FY11. These possibilities, we believe, will enable the company
to maintain 10-15% earnings growth in FY12/FY13, despite disappointments in
production.
Coal washery project awards expected by September 2011, subject to CEPI
clearances; meaningful contribution post FY14
All 20 washeries on existing mines, with a production capacity of 111m tons are likely
to be awarded by September 2011. The setting-up time is ~18 months and another 18
months will be required to reach optimum capacity utilization levels. If successfully
implemented, this will be a game changer and will entail a meaningful increase in
profitability.
However, a large part of Coal India's washery projects is in zones impacted by CEPI.
If the imbroglio continues beyond March 2011, the project awards could be delayed
(e.g. 40m tons in Mahanadi).
Expect earnings growth of 15% in FY11; staff cost to increase ~10%
FY11 staff cost is likely to increase by 10% YoY, v/s the earlier expectations of a 5-7%
increase. This is largely due to 50% increase in DA index caused by higher inflation.
DA contributes 22% of the pay structure; higher index also leads to increased gratuity,
PF, etc payment, which contributes ~30% of the pay.
Despite higher staff cost and lower dispatches, we expect 15% PAT growth in FY11.
We maintain Buy with a price target of Rs325, an upside of 8%. Given the current
headwinds in terms of inflation, interest rates, liquidity, industrial growth, etc, we believe
Coal India provides visibility of sustained earnings growth with strong structural upsides.
Visit to Jhanjra underground mines of Eastern Coalfields
at Raniganj
Raniganj is the birth place of coal mining in India; mining operations commenced here
pre-1900. Our visit to the mines involved road travel of over 600km; we passed through
the erstwhile Tata Motors Nano site at Singur, Durgapur Steel Works, etc.
The Jhanjra underground coal mines are part of Eastern Coalfields (ECL, subsidiary of
Coal India). At the Jhanjra MIC mine, we went 263 meters under the ground (equivalent
to ~70-storey building) and walked ~2km through the extracted coal seams to watch a
'continuous miner' in operation. This was the fourth coal seam, with the first three
already being closed post mining; there are four more seams below the current area
for mining operations.
We also passed through the Sonepur Bazari mines (open cast), which together with
Jhanjra mines contribute ~1% of Coal India's production but 5-6% of its profitability.
This is because a large part of the current output is being sold through the MoU route
at near import parity prices. There are plans to enhance production 3x over the next
three years, which will contribute meaningfully to earnings growth. In our interactions
across levels, phrases like 'large part of the expansion through complete mechanization',
'increased outsourcing', 'improving profitability per ton', etc were repeated several times,
indicating a meaningful change in the way business is being conducted.
Raniganj - the birth place of coal mining in India
Raniganj Coalfields, which falls under Eastern Coalfields Limited (ECL), is the birth place
of coal mining in the country. We were at the right place to gain an understanding of the
nuances of coal mining. ECL's total command area is 1,620 square kilometres and is spread
over two states - West Bengal and Jharkhand. The area of Raniganj Coalfields is 1,530
square kilometres, spread over Burdwan, Birbhum, Bankura and Purulia districts in West
Bengal and Dhanbad district in Jharkhand. Currently, ECL operates 105 mines, of which
88 are underground mines and 17 are opencast mines.
Raniganj Coalfields has the best type of non-coking coal reserves in the country, with
average ash percentage of less than 20%. The main features of this coal are high volatile
content, long flame, quick ignition and high heat value. This is most suited to Power Utilities
for replacing the import quantity. Due to its unique characteristics, Raniganj coal enjoys
high demand throughout the country.
A] Sonepur Bazari mines: Sonepur Bazari mine is an opencast mine, with proven reserves
of 215m tons, extractable reserves of 149m tons and FY10 production of 4.2m tons. It is
also the largest mine in India producing grade-B coal. ECL plans to ramp-up production at
Sonepur Bazari to 8m tons by FY14-15, including outsourcing of 1m-2m tons. Also, expansion
will be largely mechanized, which will lead to improved efficiencies. The mine has been
operational since 1995 and average strip ratio stands at 1:4.72. Given that grade-B coal
from the mine is being sold at import parity prices through the MoU route, the mine contributes
~4% of Coal India's profitability, with less than 1% of the production.
B] Jhanjra mines: Jhanjra mine is an underground mine, operational since 1989, producing
grade-B and grade-C coal. The mine has continuous miner (CM) equipment - complete
mechanization for underground mining. The CM equipment, installed since 2007, is one of
the five currently in use by Coal India. The success of CM in the mine has propelled ECL
to deploy additional CM (awarded to Joy Mining) to further augment production to 3m-4m
tons by FY14 from the current level of 1m tons+; eventual production target is 7m tons.
CM produces 1,500 tons of coal per day (0.5m tons per year) and leads to ~6x increase in
output per man hour shift (OMS) to 6 tons v/s 0.5-1m tons in a manually operated / semimechanical
underground mine. Thus, the cost of production from an underground mine can
come down meaningfully from Rs2,500-3,000/ton to Rs1,000-1,500/ton, with deployment
of CM. The capex for a CM, including the associated equipment is Rs1b.
Ramp-up in production, productivity gains can boost fortunes of ECL, Bharat
Coking Coal (BCCL), etc
Coal India derives ~10% (43m tons in FY10) of its total production from underground
mines. The share of grade-A coal (4.6m tons, GCV of 6,200 kCal/kg) and grade-B
coal (23.7m tons, GCV of 5,600-6,200 kCal/kg) is 28.4m tons. A significant part of the
high grade coal is mined through ECL and BCCL.
Currently, Coal India sells ~4.5m tons of coal through the MoU route at import parity
prices (largely grade-A and marginally grade-B). It plans to sell a significant chunk of
grade-B and grade-C coal also under MoU, going forward. Realizations under MoU
are higher at ~Rs4,000/ton, as compared with high cost of underground mines at Rs2,800/
ton in FY10.
Coal India plans to work on the strategy of improving the share of production from its
underground mines through latest technology, and also increase sales through MoU
route. This, we believe, could be a big game changer for its underground mining
subsidiaries like ECL and BCCL.
Operational concerns around theft, scale issues, technology adoption
Our discussions with the ground staff and project managers at Coal India brought out a
few key issues impacting ECL's profitability and underground mining in general.
On an average, ~20% of ECL's production is lost due to theft/pilferage. While various
remedial steps have been taken, the quantum of theft/pilferage continues to be at
unacceptable levels.
Introduction of new mining techniques like use of continuous miners necessitates a cut
in the existing workforce (which is usually opposed by the workers; Coal India has to
make do with gradual retirement of the existing old workforce) and employment of
skilled workers (who are in short-supply).B] Jhanjra mines: Jhanjra mine is an underground mine, operational since 1989, producing
grade-B and grade-C coal. The mine has continuous miner (CM) equipment - complete
mechanization for underground mining. The CM equipment, installed since 2007, is one of
the five currently in use by Coal India. The success of CM in the mine has propelled ECL
to deploy additional CM (awarded to Joy Mining) to further augment production to 3m-4m
tons by FY14 from the current level of 1m tons+; eventual production target is 7m tons.
CM produces 1,500 tons of coal per day (0.5m tons per year) and leads to ~6x increase in
output per man hour shift (OMS) to 6 tons v/s 0.5-1m tons in a manually operated / semimechanical
underground mine. Thus, the cost of production from an underground mine can
come down meaningfully from Rs2,500-3,000/ton to Rs1,000-1,500/ton, with deployment
of CM. The capex for a CM, including the associated equipment is Rs1b.
Ramp-up in production, productivity gains can boost fortunes of ECL, Bharat
Coking Coal (BCCL), etc
Coal India derives ~10% (43m tons in FY10) of its total production from underground
mines. The share of grade-A coal (4.6m tons, GCV of 6,200 kCal/kg) and grade-B
coal (23.7m tons, GCV of 5,600-6,200 kCal/kg) is 28.4m tons. A significant part of the
high grade coal is mined through ECL and BCCL.
Currently, Coal India sells ~4.5m tons of coal through the MoU route at import parity
prices (largely grade-A and marginally grade-B). It plans to sell a significant chunk of
grade-B and grade-C coal also under MoU, going forward. Realizations under MoU
are higher at ~Rs4,000/ton, as compared with high cost of underground mines at Rs2,800/
ton in FY10.
Coal India plans to work on the strategy of improving the share of production from its
underground mines through latest technology, and also increase sales through MoU
route. This, we believe, could be a big game changer for its underground mining
subsidiaries like ECL and BCCL.
Operational concerns around theft, scale issues, technology adoption
Our discussions with the ground staff and project managers at Coal India brought out a
few key issues impacting ECL's profitability and underground mining in general.
On an average, ~20% of ECL's production is lost due to theft/pilferage. While various
remedial steps have been taken, the quantum of theft/pilferage continues to be at
unacceptable levels.
Introduction of new mining techniques like use of continuous miners necessitates a cut
in the existing workforce (which is usually opposed by the workers; Coal India has to
make do with gradual retirement of the existing old workforce) and employment of
skilled workers (who are in short-supply).
Annexure
Methods of underground mining
Underground mining can be largely classified into three categories: (1) manual, (2)
semi-mechanical, and (3) fully mechanised.
In manual operations, coal is extracted using blasting, and manual digging and collection
of coal right up to the point of loading.
Semi-mechanical process incorporates use of heavy machinery for loading, viz. side
discharge loaders (SDL) and load haul dumpers (LHD).
Fully-mechanised mining involves use of equipment even for coal extraction either
through road headers (outdated technology), continuous miner (recent and most
effective) and long-wall technology (costlier, but with higher productivity). A continuous
miner enables extraction of reserves up to 75% while long-wall technology enables
extraction of reserves up to 90% (also deployed in the adjoining coal block of Jhanjra
mines visited by us).
In ECL, the continuous miner and shuttle car loads the coal on to conveyor belts,
which are chained up in a series to take the coal out of the mine.
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