Coal mine bids: Hindalco runs risk of locking itself at high captive cost

Hindalco Industries has bagged three coal mines in the Schedule-II auction — something that certainly paves the way for partial raw material security for the company. However, the market does not seem to be impressed. This is evident from the fact that the Hindalco stock has fallen six per cent since Monday.

“The company runs the risk of locking itself at high captive costs. While the mines are already being purchased at close to or higher than the e-auction landed price, the cost differential is likely to widen in the long term due to the annual escalation clause on bids,” said Abhisar Jain, senior analyst with Centrum Broking.

The company bagged Chhattisgarh-based Gare Palma IV/5 mine for Rs 3,502 a tonne, the highest priced in the lot for non-regulated sectorss. Kathautia mine in Jharkhand and Gare Palma IV/4 in Chhattisgarh were secured for Rs 2,860 a tonne and Rs 3,001 a tonne, respectively. “We estimate that captive coal costs could be higher than e-auction coal by 10 per cent by FY20 for already auctioned mines due to high bid,” said Centrum Broking in its report.

MINE MANAGEMENT

• Hindalco Industries has bagged three coal mines in the Schedule-II auction
   
• The company bagged Chhattisgarh-based Gare Palma IV/5 mine for Rs 3,502 a tonne, the highest priced in the lot for non-regulated sector
   
• Kathautia mine in Jharkhand and Gare Palma IV/4, again in Chhattisgarh were secured for Rs 2,860 a tonne and Rs 3,001 a tonne, respectively

According to the bid clause, the bid price is eligible for semi-annual escalation based on a reference index, which will be published in April and October of each financial year.

“Moreover, with Coal India aiming to increase its production in the coming years, the supply of e-auction and linkage coal in the domestic market could rise in the long run, bringing down prices due to improved supply. This could make captive coal bought at aggressive bidding costlier than e-auction coal,” he said.

The Centre had recently announced plans to boost Coal India’s annual production to one billion tonne by 2019 to meet growing fuel demand.

The Aditya Birla Group company has an annual coal requirement of 15-16 million tonnes. All the three mines put together, the company will have access to 2.8 million tonnes of captive coal.

Although the coal grades are high, only 25 percent of the company’s total coal requirement would be met via the domestic coal, said analysts.

Some analysts were of the view that the company is purely looking at a mix of pricing for the entire coal supply and is in a way hedging itself by diversifying the coal source.

“Importing coal also has several uncertainties in terms of rake availability and other infrastructure bottlenecks. All this will be eliminated if the source is captive,” said an analyst with a local brokerage.

The Kathautia mine of Hindalco would allow the company to double its Mahan smelter’s metal production to 359,000 tonnes in FY16, said Motilal Oswal Securities in a report. The block is 220 kms away from the Mahan smelter.

For the Schedule-III auction round, Hindalco is expected to be less aggressive as the mines are non-producing. This will lead to lower bid price and will average out the cost of bidding, analysts say.

“We expect restraint in subsequent rounds of bidding, but believe that material benefits in short-term are unlikely while medium-term prospects would depend on the outcome of auctions of non-producing mines and quick start of production thereafter,” Centrum said in its report.

Going ahead, the company’s cost of production amid realisations from aluminium business will be the key monitorables.