Hindalco, Jindal Coal Permits Recommended for Cancellation

Sep 03, 2014 6:47 am ET

(Updates with closing share prices in ninth paragraph.)

Sept. 3 (Bloomberg) -- Hindalco Industries Ltd., Essar Power Ltd. and Jindal Steel & Power Ltd., all run by Indian metal billionaires, risk losing coal permits for projects worth a combined $7.1 billion if the nation’s top court accepts a government proposal to annul licenses for mines that haven’t started production.

Hindalco-Essar’s Mahan coal mine in the central state of Madhya Pradesh and Jindal Steel’s Utkal B1 mine in the eastern state of Odisha would number among the 172 permits that Attorney General Mukul Rohatgi said should be canceled, at a Supreme Court hearing on Sept. 1.

The court last week ruled illegal all 218 allocations since 1993 for so-called captive coal mines, which companies use for their own projects. Cancellations would raise costs for the projects, forcing them to run on more expensive coal bought at auctions or shipped from overseas.

“We invested in the Angul project based on promise it will be given a coal block,” said K. Rajagopal, group chief financial officer at Jindal Steel & Power Ltd. “Efforts will be made to include the mine in that list.”

The Angul project was set up with a memorandum of understanding with the Odisha government and that agreement says the project will be given a coal block, Rajagopal said. Hindalco’s spokeswoman Pragnya Ram declined to comment as the matter is in court.

“Losing captive mines will impact earnings at these projects,” said Rahul Jain, a Mumbai-based analyst with CIMB Securities India Pvt. “Things may turn worse in a commodity bear market.”

Undermining Plans

State-run NTPC Ltd., India’s largest electricity producer and biggest coal consumer, may lose nine out of 10 blocks allocated to it, undermining its plans to reduce imports at its plants.

Hindalco, controlled by billionaire Kumar Mangalam Birla, and Essar Power, run by billionaire brothers Shashi and Ravikant Ruia, have invested a combined $3.8 billion in power plants and an aluminum smelter to be fueled by coal from Mahan. Jindal Steel, controlled by India’s richest woman, Savitri Jindal, plans to use coal from the Utlak B1 mine to run its $3.3 billion Angul steel plant, the country’s first to use thermal-coal gas as fuel.

Jindal Steel declined 0.8 percent to 238.10 rupees at the close in Mumbai. The stock has dropped 19 percent since the court’s Aug. 25 ruling. Hindalco advanced 0.1 percent to 175.10 rupees, paring its loss to 4.1 percent since the judgment.

Exemptions Sought

Among quarries where the government has proposed allowing work to continue are Jindal Steel’s three Gare Palma blocks in the central state of Chhattisgarh and Hindalco’s Talabira-1 mine in Odisha. NTPC Ltd.’s first coal block in Pakri Barwadih in Jharkhand is also part of the list.

The coal ministry published the list of mines at which it wants to allow production to continue on its website late on Sept. 1, without giving details of output.

The government is prepared to auction new licenses for the canceled mines, Rohatgi, the government’s top lawyer, said in his presentation to the Supreme Court in New Delhi. The court said “it was leaving its options open” and set Sept. 9 for a final hearing.

The government is aiming to maintain as much coal production as it can, as the fuel powers more than 60 percent of India’s generation capacity. State monopoly Coal India Ltd., which produces more than 80 percent of the nation’s 568 million tons of annual output, has failed to keep pace with rising demand from power plants, steelmakers and cement plants, spurring rising imports from overseas.

‘Discourage Competition’

“We should be careful of considering auctions as a solution for the natural-resources sector,” said Kameswara Rao, executive director for energy and utilities at PricewaterhouseCoopers LLP. “The sector is dominated by some large players, and an auction policy can discourage competition.”

With the court having ruled all coal allocations illegal, it isn’t clear how the 46 mines could be given legal validity, Rao said.

Of the 46, 40 are already in operation and six are on the verge of starting.

The government also suggested the court impose an additional royalty of 295 rupees ($4.87) a metric ton for coal that has already been taken from the operational mines.

Annual Production

India’s coal ministry said in July it expects production of 53 million tons in the year to March 2015 from 42 captive coal blocks, including those owned by Hindalco, Jindal Steel, Reliance Power Ltd., CESC Ltd. and Jaiprakash Associates Ltd. That’s about 9 percent of the nation’s total annual production of the fuel.

The updated list mentions four additional mines. The ministry has sought information on production, investment and progress from the companies of the linked projects by today, according to the website.

Jindal Steel may have to pay about 25 billion rupees of additional royalty, while Hindalco may need to pay 8 billion rupees, if the government’s proposals are accepted by the court, said Prasad Baji, an analyst at Edelweiss Financial Services Ltd. in Mumbai.

India’s state auditor in 2012 found that allocating the mines to companies without an auction may have cost the government 1.86 trillion rupees, worth $33 billion at the time.