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Metals & Mining
India
Coal blocks allocation—early days still. We view the Ministry of Coal’s draft
guidelines for allocation of coal blocks through a competitive-bid route as a step in the
right direction, although we would contain our optimism as we believe bringing these
policy initiatives to fruition may be a protracted process. India has an abundance of
geological reserves—160 bn tons unallocated, though we note that of the 50 bn tons
allocated so far, only 20 mines contribute 34 mtpa of production.
Bidding for coal blocks—choosing between full upfront payment and part reserve linked payment
The Ministry of Coal (MoC) has prepared a set of draft guidelines for allocating captive coal mining
blocks through competitive bidding. The MoC has proposed four sets of options to be used as the
bidding mechanism for the coal blocks. The first option stipulates bidders can offer bids on
upfront payment (paid in installments over five years) while the second option bifurcates the
payment into a fixed price and an Extractable Reserve Linked Payment (ERLP). Bidders, in this case,
would be required to bid on the ERLP (Rs per ton of extractable reserve). The other two options
essentially mirror the first two but introduce a 20% weight for technical parameters.
Abundant coal resources, though history of captive blocks development shoddy
India has 110 bn tons of proved recoverable coal reserves and a total reserves of 277 bn tons
(geological reserves). India's annual production of ~0.53 bn tons (FY2010) implies a high reservesto-
production ratio (80 years). We note that out of total reserve of 277 bn, Coal India Ltd (CIL)
accounts for 67 bn tons (24%) while another 50 bn tons (18%) has been allocated for captive
mining purposes. Thus, the country has another 160 bn tons of reserves that could potentially be
allocated through the proposed bidding route.
Captive coal mines currently contribute less than 10% of the domestic coal production at 34 mn
tons in FY2010. This despite allocation of 198 coal blocks allocated under the captive route, only
20 blocks are under production. We note that a majority of these reserves would either fall under
the indicated or inferred category or under the ‘no-go’ mining areas as stipulated by the Ministry
of Environment and Forest (MoEF).
Staggered payments will limit windfall gains to exchequer
Assuming that MoC puts up 16 bn tons of coal resources (10% of unallocated) and garners a
value of US$0.6/ton of reserves—the current trading multiple of Coal India Ltd (CIL), it could
potentially receive an a consideration of US$9.6 bn—or US$0.96 bn (10%)—in the first year of
block allocation as the fixed payment will be staggered over a period of five years from allocation
(see Exhibit 6). This would limit windfall gains to the exchequer and may not help address the
already burgeoning fiscal deficit burdened by oil import prices.
A step in the right direction but only the first step
We note that the introduction of bidding for coal blocks is a step in the right direction towards
solving India’s growing coal deficit as it would screen out the “non-serious” contenders and
ensure urgency on part of the allottee to develop the block. We note that development of captive
coal blocks has been hindered by (1) difficulties in the acquisition of land and obtaining of
environmental clearances, (2) absence of railway connectivity to facilitate evacuation of coal,
(3) land-locked nature of captive coal blocks which make them inaccessible, and (4) lack of
co-ordination between Central and State governments to facilitate development of coal blocks.
The biding mechanism – four possible set of options
In its draft guideline, MoC has proposed four possible options for the potential bidding
mechanism. The first option stipulates bidders to offer bids on upfront payment, while the
second bifurcates the payment into a fixed price and an Extractable Reserve Linked Payment
(ERLP). In this case, bidders would be required to bid on the ERLP (Rs per ton of extractable
reserve). The other two options essentially mirror the first two but introduce a 20% weight
for technical parameters.
Option 1 – Bid based on upfront payment without any technical evaluation criteria
In this case, bidding shall be done on an upfront payment amount for the notified coal
block and evaluation of the bidder will be solely based on the bid amount offered as the
upfront payment.
However, the guidelines stipulate that priority shall be accorded to those bidders whose
end-use plant are in the same state as the coal block being allocated and their overall bid
amount is not lower than the highest bid amount by more than 5%.
Only when all such bidders refuse would the block be allocated to the highest bidder.
Option 2 – Bid based on Extractable Reserve Linked Payment (ERLP)
In this case, the payment will be bifurcated into two parts – a fixed price for the block as
decided by MoC and an ERLP (Rs per ton of extractable reserve).
Fixed price shall be arrived on the basis of quantity, quality and category of coal resource
along with other parameters such as geo-mining complexities, status of exploration and
availability of infrastructure.
The evaluation of bidders would be based on the ERLP offered. Again, similar to Option 1,
priority shall be accorded to those bidders whose end-use plant are in the same state as
the coal block being allocated and their overall bid amount is not lower than the highest
bid amount by more than 5%.
Option 3 - Bid based on upfront payment with 20% weight to technical score
This is similar to Option 1 where bidders shall bid on an upfront payment amount.
However, in this case 20% weight shall be accorded to technical parameters such as
capacity of the end-use plant (10%) and the status of the end-use plant (10%).
A financial bid will thus carry 80% weight. The capacity of end-use plant shall be
evaluated relative to the highest capacity being bid. Thus if 2,000 MW is the highest
capacity being bid, it will be accorded 10 points while all other capacities will be
evaluated relative to this. In case of evaluation the status of the end-use plant, 10 points
shall be accorded to operational and complete plants and 5 points for plants under
construction.
Again, priority shall be accorded to those bidders whose end-use plant are in the same
state as the coal block being allocated and their ‘score’ is not lower than the highest
score by more than 5%.
Option 4 - Bid based on ERLP with 20% weight to technical score
This is similar to Option 2 where bidding is done on the ERLP. However, in this case 20%
weight shall be accorded to technical parameters such as capacity of the end-use plant
(10%) and the status of the end-use plant (10%) – similar to Option 3.
Again, priority shall be accorded to those bidders whose end-use plant are in the same
state as the coal block being allocated and their ‘score’ is not lower than the highest
score by more than 5%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Metals & Mining
India
Coal blocks allocation—early days still. We view the Ministry of Coal’s draft
guidelines for allocation of coal blocks through a competitive-bid route as a step in the
right direction, although we would contain our optimism as we believe bringing these
policy initiatives to fruition may be a protracted process. India has an abundance of
geological reserves—160 bn tons unallocated, though we note that of the 50 bn tons
allocated so far, only 20 mines contribute 34 mtpa of production.
Bidding for coal blocks—choosing between full upfront payment and part reserve linked payment
The Ministry of Coal (MoC) has prepared a set of draft guidelines for allocating captive coal mining
blocks through competitive bidding. The MoC has proposed four sets of options to be used as the
bidding mechanism for the coal blocks. The first option stipulates bidders can offer bids on
upfront payment (paid in installments over five years) while the second option bifurcates the
payment into a fixed price and an Extractable Reserve Linked Payment (ERLP). Bidders, in this case,
would be required to bid on the ERLP (Rs per ton of extractable reserve). The other two options
essentially mirror the first two but introduce a 20% weight for technical parameters.
Abundant coal resources, though history of captive blocks development shoddy
India has 110 bn tons of proved recoverable coal reserves and a total reserves of 277 bn tons
(geological reserves). India's annual production of ~0.53 bn tons (FY2010) implies a high reservesto-
production ratio (80 years). We note that out of total reserve of 277 bn, Coal India Ltd (CIL)
accounts for 67 bn tons (24%) while another 50 bn tons (18%) has been allocated for captive
mining purposes. Thus, the country has another 160 bn tons of reserves that could potentially be
allocated through the proposed bidding route.
Captive coal mines currently contribute less than 10% of the domestic coal production at 34 mn
tons in FY2010. This despite allocation of 198 coal blocks allocated under the captive route, only
20 blocks are under production. We note that a majority of these reserves would either fall under
the indicated or inferred category or under the ‘no-go’ mining areas as stipulated by the Ministry
of Environment and Forest (MoEF).
Staggered payments will limit windfall gains to exchequer
Assuming that MoC puts up 16 bn tons of coal resources (10% of unallocated) and garners a
value of US$0.6/ton of reserves—the current trading multiple of Coal India Ltd (CIL), it could
potentially receive an a consideration of US$9.6 bn—or US$0.96 bn (10%)—in the first year of
block allocation as the fixed payment will be staggered over a period of five years from allocation
(see Exhibit 6). This would limit windfall gains to the exchequer and may not help address the
already burgeoning fiscal deficit burdened by oil import prices.
A step in the right direction but only the first step
We note that the introduction of bidding for coal blocks is a step in the right direction towards
solving India’s growing coal deficit as it would screen out the “non-serious” contenders and
ensure urgency on part of the allottee to develop the block. We note that development of captive
coal blocks has been hindered by (1) difficulties in the acquisition of land and obtaining of
environmental clearances, (2) absence of railway connectivity to facilitate evacuation of coal,
(3) land-locked nature of captive coal blocks which make them inaccessible, and (4) lack of
co-ordination between Central and State governments to facilitate development of coal blocks.
The biding mechanism – four possible set of options
In its draft guideline, MoC has proposed four possible options for the potential bidding
mechanism. The first option stipulates bidders to offer bids on upfront payment, while the
second bifurcates the payment into a fixed price and an Extractable Reserve Linked Payment
(ERLP). In this case, bidders would be required to bid on the ERLP (Rs per ton of extractable
reserve). The other two options essentially mirror the first two but introduce a 20% weight
for technical parameters.
Option 1 – Bid based on upfront payment without any technical evaluation criteria
In this case, bidding shall be done on an upfront payment amount for the notified coal
block and evaluation of the bidder will be solely based on the bid amount offered as the
upfront payment.
However, the guidelines stipulate that priority shall be accorded to those bidders whose
end-use plant are in the same state as the coal block being allocated and their overall bid
amount is not lower than the highest bid amount by more than 5%.
Only when all such bidders refuse would the block be allocated to the highest bidder.
Option 2 – Bid based on Extractable Reserve Linked Payment (ERLP)
In this case, the payment will be bifurcated into two parts – a fixed price for the block as
decided by MoC and an ERLP (Rs per ton of extractable reserve).
Fixed price shall be arrived on the basis of quantity, quality and category of coal resource
along with other parameters such as geo-mining complexities, status of exploration and
availability of infrastructure.
The evaluation of bidders would be based on the ERLP offered. Again, similar to Option 1,
priority shall be accorded to those bidders whose end-use plant are in the same state as
the coal block being allocated and their overall bid amount is not lower than the highest
bid amount by more than 5%.
Option 3 - Bid based on upfront payment with 20% weight to technical score
This is similar to Option 1 where bidders shall bid on an upfront payment amount.
However, in this case 20% weight shall be accorded to technical parameters such as
capacity of the end-use plant (10%) and the status of the end-use plant (10%).
A financial bid will thus carry 80% weight. The capacity of end-use plant shall be
evaluated relative to the highest capacity being bid. Thus if 2,000 MW is the highest
capacity being bid, it will be accorded 10 points while all other capacities will be
evaluated relative to this. In case of evaluation the status of the end-use plant, 10 points
shall be accorded to operational and complete plants and 5 points for plants under
construction.
Again, priority shall be accorded to those bidders whose end-use plant are in the same
state as the coal block being allocated and their ‘score’ is not lower than the highest
score by more than 5%.
Option 4 - Bid based on ERLP with 20% weight to technical score
This is similar to Option 2 where bidding is done on the ERLP. However, in this case 20%
weight shall be accorded to technical parameters such as capacity of the end-use plant
(10%) and the status of the end-use plant (10%) – similar to Option 3.
Again, priority shall be accorded to those bidders whose end-use plant are in the same
state as the coal block being allocated and their ‘score’ is not lower than the highest
score by more than 5%.
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