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Coal India Limited
Quick Comment: Mines
Closure Order a Minor Issue
Impact on our views: We continue to be Equal-weight
with a positive bias. Our positive bias is underpinned by
(i) a belief that CIL will be able to push through a notified
coal price hike after conclusion of wage negotiations,
and (ii) its strong cash situation (net cash of about
US$11b, about 22% of market cap) and solid ongoing
net cash generation – in 1QF12 the addition to the cash
pile was about US$1.3b. We wait for minor near-term
issues like the beginning of wage hike provisioning to be
seen in 2QF12 results and muted volume trends of the
first two months of 2QF12 (owing to a severe monsoon) ,
to be overcome by the stock possibly in next 2-3 months
before turning outright bullish.
What's new: (1) Jharkhand State Pollution control
Board has ordered for closure of 22 mines of CIL.
(2) Wage negotiations have started and two unions have
tabled demands implying effective hikes of 25% to 90%
per our estimates.
(1) Mine Closure Order: Less than 2.5% PBT impact
if CIL does not get relief in court: (A) As per the
company this order is only for extension of mines post
2006 and not for the entire mines. We assess the
production loss to be about 6-8 mt on an annualized
basis, i.e., less than 2% of CIL’s annual output. (B) We
estimate the PBT impact to be less than 2.5% for CIL.
(2) We are comfortable with our 35% wage hike
forecast: It is not surprising for the unions to start
negotiations from a high demand level and we feel that
our average hike assumption of 35% is realistic. Notably,
if we adjust for the fact that about 90% of CIL’s
manpower will be eligible for a wage hike we are
effectively forecasting a 40% increase which seems
unlikely to be exceeded.
Mine Closure Order
Jharkhand state pollution control board has ordered immediate
closure of 22 mines of BCCL (Bharat Coking Coal Ltd, one of
Coal India's 100% subsidiaries) for …
1. Enhancing capacity, and
2. Converting underground to open cast mines
… without taking proper environmental clearance.
Our view
(A) This order referring to 22 coalmines is not for the
entire mines. It is only for extension of mines or part of
mines that have been converted from underground to
open cast – after 2006.
(B) We believe Coal India may appeal against the order in
court to take a stay order until the issue is settled. It
may also try to seek the intervention of the central
Ministry of Environment. It is difficult to say if the
company will get a stay in the courts or support from
the ministry.
Given that Coal India operates more than 450 mines we feel
that settling environmental issues properly will be an important
part of CIL’s routine operations, on an ongoing basis. Many
such cases had been mentioned in CIL’s Red Herring
Prospectus (in risk sections and elsewhere). In fact most
mining or heavy manufacturing companies face such issues
regularly.
At any point in time, environment or forest related controversies
for some mines out of these 450 are not uncommon. However,
orders for closure of parts of the 22 mines in one stroke should
not be taken as routine.
Some facts about BCCL
• BCCL was about 7% of Coal India’s total production
and dispatch volumes, and about 4% of PBT in
1QF12.
• BCCL in total has about 80 mines that produce about
30 mt annually. Given that parts of 22 mines have
been ordered to close we may see 6-8 mt annualized
capacity being shut out for some time.
• BCCL is just about 10% underground mines.
Underground mines typically have more employees
per ton of output and hence have higher fixed costs.
• It produces about 40% of CIL's coking coal.
• Some of the larger mines that may have to shut some
part of their operations post this order are Muraidih
and Block -2.
Company Description
Coal India Limited is the largest coal producer in the world with
production of 431mt as of FY10. The company has the largest
reserve base in the world of around 19bt as per JORC
standards. Primarily an open-cast operator, the company has
nine subsidiaries and operates 471 mines in 21 coal fields
across eight states in India.
India Nonferrous Metals & Mining
Industry View: Attractive
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal India Limited
Quick Comment: Mines
Closure Order a Minor Issue
Impact on our views: We continue to be Equal-weight
with a positive bias. Our positive bias is underpinned by
(i) a belief that CIL will be able to push through a notified
coal price hike after conclusion of wage negotiations,
and (ii) its strong cash situation (net cash of about
US$11b, about 22% of market cap) and solid ongoing
net cash generation – in 1QF12 the addition to the cash
pile was about US$1.3b. We wait for minor near-term
issues like the beginning of wage hike provisioning to be
seen in 2QF12 results and muted volume trends of the
first two months of 2QF12 (owing to a severe monsoon) ,
to be overcome by the stock possibly in next 2-3 months
before turning outright bullish.
What's new: (1) Jharkhand State Pollution control
Board has ordered for closure of 22 mines of CIL.
(2) Wage negotiations have started and two unions have
tabled demands implying effective hikes of 25% to 90%
per our estimates.
(1) Mine Closure Order: Less than 2.5% PBT impact
if CIL does not get relief in court: (A) As per the
company this order is only for extension of mines post
2006 and not for the entire mines. We assess the
production loss to be about 6-8 mt on an annualized
basis, i.e., less than 2% of CIL’s annual output. (B) We
estimate the PBT impact to be less than 2.5% for CIL.
(2) We are comfortable with our 35% wage hike
forecast: It is not surprising for the unions to start
negotiations from a high demand level and we feel that
our average hike assumption of 35% is realistic. Notably,
if we adjust for the fact that about 90% of CIL’s
manpower will be eligible for a wage hike we are
effectively forecasting a 40% increase which seems
unlikely to be exceeded.
Mine Closure Order
Jharkhand state pollution control board has ordered immediate
closure of 22 mines of BCCL (Bharat Coking Coal Ltd, one of
Coal India's 100% subsidiaries) for …
1. Enhancing capacity, and
2. Converting underground to open cast mines
… without taking proper environmental clearance.
Our view
(A) This order referring to 22 coalmines is not for the
entire mines. It is only for extension of mines or part of
mines that have been converted from underground to
open cast – after 2006.
(B) We believe Coal India may appeal against the order in
court to take a stay order until the issue is settled. It
may also try to seek the intervention of the central
Ministry of Environment. It is difficult to say if the
company will get a stay in the courts or support from
the ministry.
Given that Coal India operates more than 450 mines we feel
that settling environmental issues properly will be an important
part of CIL’s routine operations, on an ongoing basis. Many
such cases had been mentioned in CIL’s Red Herring
Prospectus (in risk sections and elsewhere). In fact most
mining or heavy manufacturing companies face such issues
regularly.
At any point in time, environment or forest related controversies
for some mines out of these 450 are not uncommon. However,
orders for closure of parts of the 22 mines in one stroke should
not be taken as routine.
Some facts about BCCL
• BCCL was about 7% of Coal India’s total production
and dispatch volumes, and about 4% of PBT in
1QF12.
• BCCL in total has about 80 mines that produce about
30 mt annually. Given that parts of 22 mines have
been ordered to close we may see 6-8 mt annualized
capacity being shut out for some time.
• BCCL is just about 10% underground mines.
Underground mines typically have more employees
per ton of output and hence have higher fixed costs.
• It produces about 40% of CIL's coking coal.
• Some of the larger mines that may have to shut some
part of their operations post this order are Muraidih
and Block -2.
Company Description
Coal India Limited is the largest coal producer in the world with
production of 431mt as of FY10. The company has the largest
reserve base in the world of around 19bt as per JORC
standards. Primarily an open-cast operator, the company has
nine subsidiaries and operates 471 mines in 21 coal fields
across eight states in India.
India Nonferrous Metals & Mining
Industry View: Attractive
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