JPMorgan:: Lanco Infratech - A closer look at issues around Australian coal mine acquisition

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Lanco Infratech Neutral
LAIN.BO, LANCI IN
A closer look at issues around Australian coal mine
acquisition


Recent concerns around Lanco’s Australian coal mine arise from news articles
(eg, ET in India, The Australian) on a) a new lawsuit and b) continued debate
on mining tax and export pricing. The outcomes of these issues are risks to the
value of the mine. We remain cautious on Lanco and the IPP space, given
headwinds on execution, fuel and leverage.
 Perdaman Industries has sued Lanco for A$3.5B, alleging that financing
for its coal-to-urea plant fell through on account of the latter’s coal pricing.
The suit comes up for hearing on 27th July in Supreme Court of Western
Australia. The contract is for 2.7mtpa.
 ET reported that Lanco is raising coal prices for Bluwaters, an existing
power station customer of Lanco. Bluwaters buys 1.6mtpa coal from Griffin
coal mines. We believe the current agreed supply price is US$40/ton, which
is below market.
 The government’s stance on mineral taxes has remained unchanged
since July-10, when Australia’s MRRT (mineral resources rent tax)
recommendations were proposed. The policy is not final, however, and
mineral tax continues to be debated: the opposition's view is that taxes
should be higher than 30%. From Lanco’s perspective, the other important
thing is the suggested netback calculation for transfer pricing for exports,
but the policy is not very clear on this.
 Background: Lanco acquired Griffin coal mines in Australia, with current
production of around 4.5mtpa. NPV of acquisition is A$730M (incl
A$480M upfront), while estimated capex on raising the production to
17mtpa is A$850M over 6-7 years. Griffin mine’s share of our SOP value
for Lanco is just Rs0.5/share, based on our NPV for the former.
 Outcome of the litigation and mineral taxes would have implications for
key Indian IPP players which have coal mining interests in Australia (eg,
Adani – Galilee, GVK – Hancock) or are pursuing acquisitions (eg, RPWR
/ others – Metrocoal, and NTPC/GMRI/others – Bandanna).