Tata Power's Indonesia mine sale hits roadblock

Falling coal prices hits $500-mn deal

Tata Power’s plans to sell its 30 per cent stake in Arutmin mine in Indonesia for close to $500 million to Bakrie Group of Indonesia is delayed due to a crash in coal prices and debt restructuring plan pending with lenders.

The transaction was signed in January 2014, with the company announcing it would sell the mine to get additional cash flow and reduce its consolidated debt.

The company says it is still pursuing the transaction even as bankers are not so bullish. “Tata Power signed an agreement for the sale of its 30 per cent equity in Arutmin and associated infrastructure companies in 2014. The conditions precedent to closing the transaction is being pursued and the company is pursuing necessary steps to complete this transaction,” a Tata Power spokesperson said.

Tata Power's stock is down 12 per cent since January and had been down 33.5 per cent in the past one year as it closed at Rs 72 a share on Tuesday.  The transaction was to help Tata Power to cut its massive consolidated debt which rose to Rs 40,841 crore as on March 2015. The Mundra power project and a dispute over the electricity prices with various distribution companies have resulted with the company’s debt going up.

Besides, a 50 per cent decline in coal prices from its peak of 2011 had increased the company’s woes.

The company has sought to refinance its loans of Rs 10,000 crore taken for Mundra project in Gujarat with the Indian banks under the 5/25 scheme. Under the 5/25 scheme, a bank can extend the loan by 25 years with an option to refinance it in the next five years.

An analyst with Barclays says every 10 per cent decline in coal prices affects the company's valuation by Rs 5 a share as long as all other parameters remain the same.

Analysts said in the coming months any further drop in coal prices and legal cases impacting the potential implementation of the variable compensatory tariff hike being provided to the Mundra UMPP (ultra mega power project) by the Central electricity regulator will impact the company’s valuation.

Tata Power is not the only company which has seen its calculations over overseas coal mines go awry.

The Essar Group, the Adani Group, Lanco, and GVK are few other groups, which are facing the brunt of falling coal prices.  Most of the coal mines of top Indian corporates are either making losses or are on the verge of closure.

Analysts say the return on these investments will continue to be negative in coming years as well, as coal prices remain at record lows (see chart).

Essar Group’s $600-million investment in Trinity Coal Corp in the US turned bad as the company went into Chapter 11 in 2013. The investments by GVK Group ($1.26 billion in Hancock), Lanco ($600 million in Griffin) and Adani Enterprises ($1 billion) in the Australian coal sector in 2011 remain in the red.