India Equity Research: Metals and Mining - Coal blocks review highlights risks of delay;

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The review of captive coal blocks by the Ministry of Coal implies risks of a delay in the commencement of JSPL’s Utkal-B1 mine (linked to 6x135MW power plant). Hindalco and NALCO might also be issued show-cause notices for certain mines, but we have assumed no benefit of the mines in our valuation and forward estimates.

n MOEF likely to issue guidelines for clearance of “no-go” area mines

n Ministry of Coal noted that even as the “go”/”no-go” area concept was dropped in July 2011, state level offices of MOEF are not processing “no-go” related applications. MOEF is expected to issue guidelines to these offices to enable the processing of such applications. State governments were also asked to expedite the process of land acquisition, improve law and order and processing of forest/environmental clearances.

n JSPL: Risks of delay in captive coal mine for Angul power plant

Jindal Steel & Power’s (BUY, CMP: INR547, target price: INR661) Utkal-B1 coal mine in Orissa will supply fuel to 6x135MW captive power plant as part of the Angul Project. With the Orissa govt insisting on 33% free power from captive coal-linked projects, mining lease is yet to be signed for Utkal-B1 while the land acquisition is pending. This reduces the visibility of timely commencement of mining. We have assumed it to start by Jan-13 as against the management guidance of Sep-12 for the mine. Ministry has also found progress on this and other coal blocks (Amarkunda, Urtan North, Ramchandi and Jitpur) of JSPL to be unsatisfactory. Show-cause notice may be issued for Jitpur coal block of JSPL, but such a notice has also been previously issued in October 2010.

n NALCO, Hindalco may get show-cause notices

Progress of Auranga coal block allotted to Hindalco-Tata Power and the Utkal-E coal block allotted to NALCO was found to be unsatisfactory, forcing the Ministry of Coal to decide to issue show-cause notices on why these coal blocks should not be de-allocated. In case of Hindalco (BUY, CMP: INR132, target price: INR197), the coal block is for the 0.359mtpa Jharkhand aluminium smelter. Around 740 acres of land have been acquired and another 1,000 acres would be acquired by May 2012. We have not considered this project/coal mine in our estimates or valuation. NALCO (REDUCE, CMP: INR59, target price: INR50) has already spent ~INR1bn on its Utkal-E coal block and paid for the land. No impact is seen on our estimates and valuation, like Hindalco.

n Outlook & valuations : Closer monitoring of captive coal blocks

We see risks of a delay in the commencement of captive coal mine for the 6x135 MW power plant of JSPL in Angul. We have ascribed a valuation of INR 26/share to this project; we currently have a BUY/SO recommendation on JSPL with a target price of INR661. With the coal shortage escalating, we see a closer monitoring of coal blocks by the Ministry of Coal; hence a higher risk of de-allocation for non-compliance.

Metals and Mining - Coal blocks review highlights risks of delay; sector update