The Comptroller and Auditor General’s (CAG) final report on coal block allocations has reaffirmed its view that the Government of India (GoI) should have adopted the auction route post 2004. The report lists 57 coal blocks with “windfall gains” estimated to be INR1.86tn. More than the issue of “windfall gains”, we are concerned about further delays in mining approvals due to policy freeze and/or imposition of conditions which could dilute returns from mines. In such an event, while most metal & mining companies could be impacted, the effect may be more pronounced on Hindalco, JSPL and Sterlite-BALCO. On the positive side, allocations to Coal India (CIL) may increase as recommended by CAG.
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CAG indicts GoI for faulty coal allocation methodology post 2004
The CAG report has indicted the GoI for not following the auction mechanism for allotting captive coal blocks post 2004 as per its own internal recommendation, and adopting a non-transparent, screening committee-based mechanism without comparative evaluation. The report lists 57 coal blocks as benefiting from likely “windfall gains” of INR1.85tn (draft report figure: INR2.93tn). Ironically, all of these mines, except one, are non-producing and are awaiting approvals for 3+ years. We view the “windfall gain” estimate as overstated considering no application of the present value/DCF concept, use of back-of-the envelope calculations and the significant uncertainties in obtaining mining approvals. Details of key coal blocks (among 57) are provided in Table 1.
Proposes single window clearance for granting mining approvals
CAG has proposed a joint committee of Coal Ministry, MOEF, Mines Ministry and state governments for speedy approvals for coal mines. The report also indicates setback to CIL due to de-allocation of 48 blocks, none of which have commenced production and hence the need to allocate blocks to the company to boost coal production. Other recommendations include: (i) incentive mechanism for speedy production; and (ii) encashment/tightening of bank guarantees.
Outlook: Potential adverse impact across the board
Companies holding the 57 coal blocks with potential adverse impact include: (i) metals & mining: Bhushan Steel, Hindalco, JSPL, JSW, Tata Steel, HZL, BALCO, Sterlite Energy, Usha Martin, Monnet Ispat, Jai Balaji, Electrosteel Castings, Adhunik Metallics, Tata Sponge; (ii)cement: UltraTech Cement, Grasim, Birla Corp, Ambuja Cement; (iii) power: Tata Power, CESC, Adani Power, Lanco, NavBharat. Within this list, companies with advanced/completed projects include Hindalco-Mahan and BALCO-CPP. While JSPL’s Utkal-B1 coal is not named, it may also face approval delays. On the positive side, we could see more coal block allocation to PSU companies, including CIL.
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