Jindal Steel & Power (JSPL) today announced completion of acquisition of CIC Energy (CIC) for USD115mn (consideration already agreed to in July 2012). CIC provides JSPL access to 2.4bn tonnes of coal resource in Botswana. However, due to lack of logistics linkages, exploitation of this resource can only be via the 300MW power plant to be developed in three years. The development of required railway line has not commenced yet and hence we have no visibility on merchant mining. Retain estimates and maintain ‘BUY’ with target price of INR508.
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CIC Energy acquisition completed
The acquisition will give JSPL access to 2.4bn tonnes of thermal coal resources in Botswana (JSPL estimates 6bn tonnes). CIC plans to set up 300MW power plant with captive coal over the next three years. The coal mine has approvals, but lacks logistics linkages and hence can only be utilised for pit-head power generation. In the next phase, CIC/JSPL are evaluating the possibility of a 1,200MW power plant for supply to South Africa (grid connectivity available, but uncertainty on South African power regulations has kept the project on hold).
Back-ended development and logistics key issues
Development of the 1,500 km railway line that CIC will need for coal evacuation has not commenced yet. Hence, there is no visibility on coal export (merchant mining). The 300MW power plant (with 2mtpa coal consumption) is in early stages and no PPA has been signed as yet with local power authorities.
Outlook and valuations: Long-term possibilities; maintain ‘BUY’
Capex for mine development and 300MW power plant is estimated at USD100mn and USD600-700mn, respectively; JSPL has not indicated funding plan for the same. CIC disclosures indicate that usable coal is ~1.0bn tonnes (post beneficiation) from 2.4bn tonnes. At this stage, we maintain our estimates and retain our ‘BUY/Sector Outperformer’ recommendation/rating with a price target of INR508. The stock trades at 6.2x FY14E EV/EBITDA valuation.
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