Metals and Mining - Coal Block Case: Mine Owners Woes Continue; Sector Update :: Edelweiss PDF link

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The Supreme Court (SC) today passed a key judgement cancelling all 218 captive coal blocks (barring 4 belonging to SAIL, NTPC and Reliance Power). It also imposed penalty of INR295/t on producing coal blocks since start of production, transferring their operations to Coal India (CIL) within 6 months. The judgement is silent on auction and it will be up to the government to decide on the same. We see a risk that all the deallocated mines may not be auctioned, CIL may retain certain producing blocks and supply only part of current mine-owner’s production. We perceive highest impact on JSPL (~12mtpa production) with penalty of INR30bn (INR33/share), FY16E EBITDA cut of ~8% and target price reducing to INR209 (earlier INR304). Impact on Hindalco will be marginal- penalty of INR5bn (INR2.5/share), FY16E EBITDA cut of ~2% and target price reducing to INR223 (earlier INR240). With correction in JSPL stock, we retain ‘HOLD’ on the company; maintain ‘BUY’ on Hindalco.

SC cancels all coal blocks; CIL to takeover within 6 months

In its judgement today, the SC ordered: (i) all 218 captive coal blocks to be cancelled, barring 4 blocks of NTPC, SAIL and Reliance Power; (ii) 40 producing coal blocks to pay a penalty of INR295/t since start of production; and (iii) all producing coal blocks to be turned over to CIL within next 6 months. The judgement is silent on possible auction of the coal blocks and the onus is on the government to decide future course of action.

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JSPL to take highest hit; marginal impact on Hindalco

Going forward, we see the risk that all the deallocated mines may not be auctioned, CIL may retain certain producing blocks and supply only part of current mine-owner’s production. For JSPL (~12mtpa production), the impact is maximum consisting of: (i) one-time penalty of INR30bn (INR33/share); (ii) ~8% cut in FY16E EBITDA on estimated increase in coal cost by INR600/t; and (iii) TP reducing to INR209 from INR304 currently. For Hindalco (~2.5mtpa), the impact will be marginal: (i) one-time penalty of INR5bn (INR2.5/share); (ii) cut in FY16E EBITDA by ~2%; and (iii) TP reducing to INR223 from INR240.

Coal India to be prime beneficiary

In one stroke, CIL has been allocated 40 coal blocks producing @40mtpa currently and with reserves of ~2bt. It is not clear if the rest of the cancelled coal blocks of ~38bt reserves will also go to it. Nevertheless, it is a significant addition for the company.

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https://www.edelweiss.in/research/Metals-and-Mining--Coal-Block-Case-Mine-Owners-Woes-Continue;-Sector-Update/27141.html