coal sector india

India Coal SectorA Primer

August 2010

Jaideep Goswami Jonas BhuttaTel: (91) 22 6622 1010 Tel: (91) 22 6622 1008

E-mail: [email protected] E-mail: [email protected]

Saurabh Mehta Tel: (91) 22 6622 1009

E-mail: [email protected]

ContentsExecutive summaryThe allocation and development of mines

– Background on mine allocation– Mine development … timelines– The mine-allocation process– Key challenges in the allocation procedure

Captive coal mining– Genesis: captive coal mining in India– End-use industries allocated captive mines– Allocation of captive block reserves by state– Estimated reserves– Reasons for the captive mine development delays

Coal washeriesAnnexure

2

Executive summaryCaptive mining. Introduced in 1993 for end use by the operating company (power, cement, and steel), to meet the rising demand for coal and due to the inability of Coal India (CIL) to ramp up production (1993-2009: 208 captive coal blocks allocated with total reserves of about 45bn tonnes).Current output. Twenty-five mines are operating currently, and output for FY10 was about 35m tonnes. The government expects the ramp-up in production at the existing mines and new production to increase output to 80m tonnes by FY12 (about 22 blocks allocated from 1993–2003 are due to be commissioned). Mine-development process. Geological report (two years) > mining plan (six months) > technical committee (three months) > environment approval (EA) and forest approval (FA) (two-to-six years) > land acquisition and mining leases (concurrent with EA and FA, two-to-six years) > production (six-to-12 months).Hurdles to mine development: a) lengthy processes for EA and FA, b) location of a mine in a red-corridor area, c) a lack of mining experience, and d) the joint allocation of mines.

3

Executive summary

Tides of change (under review by the government)– Captive mining

» Single-window approvals. All major approvals to be handled by a central agencybefore allocation to a developer

» Competitive bidding. Based on the average selling price of coal during thelifespan of a mine (to maintain a check on coal prices)

– Industry-wide initiatives» Coal regulator. In the 2010-11 Budget, the government suggested setting up

regulatory authorities, similar to those for the power sector (Central ElectricityRegulatory Commission [CERC] and Central Electricity Authority [CEA]

» No-go areas. The Ministry of Environment & Forestry (MOEF) demarcated no-goareas, which we expect to speed up the process of obtaining approvals, currentlythe biggest hurdle to mine development

4

5

Background on mine allocationPre Electricity Act era (1993-2003)– CIL and its subsidiaries were the only players– The concept of captive mines was more of a push from the government than a pull from

the private sector» In the period many of the mines were allocated to ‘non-serious’ players

Post Electricity Act (since 2003)– A conscious decision by the government to increase coal output, due to:

» A rising demand-supply gap. At the end of the 11th Five-Year Plan (2007-12 imports wouldaccount for 12% of demand, according to the Planning Commission

» The inability of CIL to scale up its production growth above 5-6% YoY» The entry of the private sector into power generation has led to more interest in captive mines» To-date, 208 mines have been allocated, most of them from 2005-08

Increasing demand – the supply shortfall supports the case for captive mining

Mine development … timelines

6

0 1 2 3 4 5 6 7 8 9 10

Years taken for completion of each stage

Activ

ities

/Sta

ges

Geological report

Mining plan

Technical committee

Environmental & forestry approvals

Land acquisition and mining leases

Production

Best-case scenario Ideal scenario Exceptional scenario

The mine-allocation process

7

Production

Forestry & Environmental Clearance

Total of 86 approvals required

Approvals/procedures Timeline Avg cost (Rs m) RemarksGeological report 2-3 yrs 20-150 Prepared by CMPDIL (a subsidiary of CIL) to

estimate the proven reserves, the backbone for preparing the mining plan

Mining plan 6 mths Negligible Prepared by recognised qualified persons in collaboration with the applicant

Technical-committee approval 2-3 mths n.a. A group of of experts from a number of agencies approve the mining plan

Notification to the allotted company n.a. n.a. The applicant is allocated the mine

Environment & forestry approvals 2-6 yrs Negligible MOEF

Land acquisition and mining leases 2-6 yrs Rs0.3m/acre and Rs0.3m/family for relocation

Runs concurrently with FA & EA

Production 6 mths-1yr Rs1,600-2,400/tonne Avg cost of mining from open-cast and underground mines

Source: Ministry of Coal, Daiwa

Forest approval … a backgrounderThe MOEF is the agency that awards the final approvals.Most mines are located near rivers and forests, and the conversion of forest land for mining use can be problematic.Brief overview of the procedure for the usage conversion of forest land

– Stage 1. Receive approval in principle to convert the forest land by adhering to the rules and regulations of the Coal Bearing Areas Act 1957. The main agencies the application must be reviewed by are shown below

– Stage 2. Deforestation in phases by simultaneously implementing the Environment Management Plan

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Forest sheriff

District forest officer

Conservator of forest

Conservator of forest - state

Secy. Forest - state

Minister of forests - state

Sr. asst. inspector forest (MOEF) - central government

Forest advisory committee - central government

Minister Forest - India Government

In the best-case scenario,an application has to go to52 different desks toreceive an EC&FC.

The minimum time toobtain an EC&FC is twoyears, but can take aslong as six years.

Stage-1

Key challenges in the allocation procedureOur discussions with industry participants highlighted the following challenges.EA and FA appears to pose the greatest hurdles in the mine-development process.

– Even if everything is in order it is still necessary for the application to go across at least 52 desks for an FC– The involvement of a large number of agencies in the process creates redundancy

Village > Taluka > District > State > Central Government (various ministries)– Public hearings, held by the State Pollution Board and in which all the stakeholders participate, are the most

difficult part of obtaining an EC– Having an Environment Management Plan approved should take one-to-two years but can take up to six

Land acquisition is another sore point– The lack of a single-window land-acquisition agency means the applicant is dependent on its relationship

with localsIssues highlighted by Utkal Coal Co. in a joint review meeting on the progress on captive coal blocks in March 2008. The company was allotted the mine in 1998.

However, we expect changes going forwardIn order to speed up the mine-development process the government has suggested the following ideas:

– Single-window approvals. To allocate mines along similar lines to the ultra mega-power projects– Competitive bidding. Undertake competitive bidding for the coal blocks to improve transparency. The bids

would be dependent on the average selling price of coal during the life of the mine– Coal regulator. In the 2010-11 Budget, the government suggested setting up regulatory authorities, similar

to those for the power sector, CERC and CEAWe expect the majority of delayed mines to come on-stream by 2012. We expect many of thecaptive mines that were allotted from 1993-2009 and delayed to start producing in 2011-12, raising captivecoal production from 17m t.p.a for 2007 to 81m t.p.a. for 2012. Meanwhile, mines linked to 12th Five-YearPlan projects will go into production after 2012

10

0.7 1.8 3.0 3.8 4.5 5.5 7.8 10.1 13.6 17.6 21.2 29.9

37.1

80.9

0102030405060708090 Captive coal production

Source: Ministry of Coal

Captive Coal Mining

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Genesis: captive coal mining in India

Captive mining is for a company’s own end use (power plant, cement, and steel). A captive-mining policy was introduced in 1993 to meet a rise in coal demand.CIL and its subsidiaries were unable to meet demand.As more than 70% of incremental power capacity is based on coal, the supply of coal is crucial to meeting the rising demand for power.Some 208 captive coal mines, with estimated geological reserves of more than 45bn tonnes, were approved from 1993-2009.The first captive block was allocated in 1993 and captive-mine production began in 1997.Currently, 25 captive mines are in production, with output of about 30m tonnes for 2009. For 2012, we forecast captive mines to produce more than 80m tonnes.

12

Captive coal mining in India

13

Captive mines were first allocated in 1993, with a total of 19 blocks allocated by 2002 and 21 blocks allocated in 2003.To date, 208 coal blocks have been allocated for captive mining to reduce the demand-supply gap.

215

24

53

52

24

208

0

50

100

150

200

250

1993 - 2002 2003 2004 2005 2006 2007 2008 2009

Allocation of captive blocks

Source: Ministry of Coal, CEA

End-use industries allocated captive mines

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Power39.9%

Iron & Steel30.8%

Commercial Mining18.8%

Coal to liquid1.0%

Cement3.8%

Small & Isolated1.0%

UMPP's4.8%

Captive coal mines were allocated for companies own use in the power, iron and steel, and cement sectors as well as others.Coal-based capacity additions totalling 100GW are targeted in the 11th and 12th Five-Year Plans.

Breakdown of end-use industries


Allocation of captive block reserves by state

15

Andhra Pradesh 1.4%

Arunachal Pradesh0.3%

Chhattisgarh21.4%

Jharkhand26.6%

Madhya Pradesh 9.0%

Maharashtra13.1%

Orissa 21.7%

West Bengal 6.6%

Most of the captive coal blocks are located in difficult operating areas (red corridor) and have low grades of coal (high ash content).

Overall, reserves of more than 45bn tonnes have been allocated

Breakdown of allocated reserves by state


Estimated reserves

16

3.3 2.2 3.1

17.6

11.9

3.4 4.202468101214161820

0

10

20

30

40

50

60

1993 - 2002 2004 2005 2006 2007 2008 2009

Coal reserves Coal Blocks allocated

units

bn tonnes

To-date, captive coal blocks with estimated reserves of more than 45bn tonnes have been allocated.

Coal reserves allocated from 1993-2009


Mines allocated (1993-2003) – 23 blocks have started production

17

10

10

2

2

9

3

9

9

8

9

5

4

4

6

6

6

1993 1995 1997 1999 2001 2003 2005 2007 2009

CESC Ltd

INDAL/HINDALCO

WBSEB/BECML

WBPDCL/BECML

BLA Industries

JSPL Ltd.

Monnct Ispat Ltd.

Jindal Power Ltd.

Jayaswal Neco Ltd.

RASL now SEML

PSEB

Prakash Industries Ltd.

Arunachal PMDCL

KPCL

WBPDCL/BECML

Usha Martin Ltd.

Achieved peak-rated capacity

GR– 140.47m tonnes

GR– 22.55m tonnes

GR– 84.47m tonnes


Usage – Small Isolated Dispensation, GR–9.3m tonnes

GR– 124m tonnes

GR– 106m tonnes

GR– 246m tonnes

GR– 29.76m tonnes

GR– 8 m tonnes


Commercial – 27m tonnes

GR– 34.48m tonnes

GR– 125m tonnes

GR– 562m tonnes

GR– 156m tonnes

Usage – sponge iron

years

years

years

years

years

years

years

years

years

years

years

years

Years

years

years

years

Usage – power Government


18

Mines allocated (1993-2003) – 15 are due to start production in 2010

14

14

12

11

9

9

7

7

7

7

7

7

7

7

1996 1998 2000 2002 2004 2006 2008 2010 2012

IISCO/SAIL

WBPDCL

Utkal Coal Ltd

Monnct Ispat Ltd.

B.S Ispat

GVK Power

OMDC

CMDC

TVNL

JSPL Ltd.

Field Mining & Ispat

Gondwana Ispat

Bhusan

Shree Baidyanath Ayurved years

years

years

years

years

years

years

years

years

years

years

Years

Years

years

years

years

Usage – sponge iron Usage – power

GR– 285m tonnes



GR– 106m tonnes

GR– 34.34m tonnes

GR– 92.3m tonnes





GR– 38m tonnes

GR– 31.5m tonnes

GR– 80m tonnes

GR– 36m tonnes

Usage – others Government


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Captive coal blocks allocated in 2004

Government 4

80.0%

Private1

20.0%

Individual , 100%

Joint, 0%

One coal block was allocated to National Aluminium (NACL IN, Rs430 , 5), most of the approvals are in progress, but land acquisition is being held up by a boundary dispute.Approvals for another three mines are in progress and the government expects the mines to start production by FY11. For NTPC’s (NATP IN, Rs194.1, 1) mines, the lack of evacuation infrastructure is a major hurdle to developing its mines.

Breakdown of allocated mines Ownership of the mines allocated

Source: Ministry of Coal Source: Ministry of Coal

Note: The details of each block are available from us


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Individual , 92%

Joint, 8%

Government 8

33.3%

Private16

66.7%

Of the eight blocks allocated to government-owned companies, one block that was allocated to DVC (Not listed) was de-allocated by the Ministry of Coal, while four of the seven remaining blocks are expected by the government to start production between 2010-11.Three mines have started production, five are expected by the government to start production in 2010-11, while approvals for the others are in progress.

Breakdown of allocated mines Ownership of the allocated mines




21

Individual , 64%

Joint, 36%

Government 32

60.4%

Private21

39.6%

There has been no significant progress on the approvals for most of the mines allocated to the government companies.Of the mines allocated in 2006 to private companies, 16 are expected by the government to start production by 2010-11, subject to approval by MOEF.

Breakdown of the allocated mines Ownership of the allocated mines




22

Individual , 87%

Joint, 13%

Government 34

65.4%

Private18

34.6%

There has been no significant progress in receiving approvals for most of the mines allocated to the government companies.Progress by the private players has been relatively better, with eight mines expected by the government to start production between 2011 and 2013.


Source: Ministry of CoalSource: Ministry of Coal



23

Government 4

16.7%

Private20

83.3%

Individual 37.5%

Joint56%

No progress in any of the four mines allocated to the public-sector units as the blocks are either unexplored or only partially explored.There has been progress for only four of the mines allocated to the private companies (expected to begin production between 2011 and 2014). There has been no significant progress on the other 16 mines, most of which were jointly allocated.





24

Individual , 44%

Joint, 56%Government

133.3%

Private2

66.7%

The East of Damogoria (Kalyaneshwari) block was allocated to WBPDCL.Two coal blocks, North of Arkhapal and Ramchandi, were allocated to Tata-Sasol and Jindal Steel & Power (JSP IN, Rs654.3 , 2), respectively, for coal-to-lignite projects. Both these private entities have provided bank guarantees.




Reasons for captive-coal-mine development delays

There is a lack of mining experience on the part of the private developers and a lack of initiative by the government companies, in our view.The locations of the captive coal blocks. – Mostly in the red-corridor area (impoverished regions in the east of India that

experience considerable Naxalite Maoist militant activity)– No support from the state governments in terms of security Land acquisition – The relationship between the local people and the district authorities is key, in our view – A lack of initiative from the state governments in expediting land acquisitions

Forest approvals– Most of the mines are located on forest land and converting forest land to other uses is

a very lengthy and tedious process (it takes from five-to-seven years)– Applications have to go pass over at least 52 desks to receive approval

25

Reasons for captive-coal-mine development delaysEnvironment approvals

The process is very academic in natureA lack of on-the-ground experience for those responsible for approvalsNo set standards for obtaining the approvals; it comes down to the interpretation of the individuals responsible A ‘public hearing’ can be the most difficult part of the environment clearances for a miner as all stakeholders involved are party to the decision-making process of providing the approval

Joint allocation (an obstacle to development that accounts for on 20% of total captive allocation)

Some 44 captive mines with geological reserves of more than 12bn tonnes have been allotted jointlyThere has been no consultation among the various developers involvedDifferences in the financial status (a lack of financial strength for the joint-venture partner) and objectives and timelines for the mines use by the developers

26

A step in the right direction

27

The MOEF has demarcated clearly the no-go areas (require approval from the prime minister’s office). We expect this to speed up the process of obtaining approvals, which is currently the biggest hurdle to developing captive mines.

Coal Washeries

28

Coal washeries

India coal has a high ash content (30-45%, compared with 15-20% for that from countries such as Australia, South Africa, the US, and Indonesia).The cleaning of coal (coal beneficiation) assumes an importance from the environmental and long-distance transportation point of view.There is an emphasis on coal washing, because the MOEF and the India Government require that washed coal be used for power plants.After 22m t.p.a. of coal is washed, the ash content is 34-38% and 4-4.5m t.p.a. is rejected as the ash content is 57-62%.Handling such a large rejected amount in an environmentally-friendly manner is one of the biggest challenges faced by the coal-washery operators.In coal-beneficiation plants, 15-20% of the coal is rejected.

29

Coal washeriesAt the end of the 1990s, the MOEF recommended that power plants located in urban/sensitive areas and those located more than 1,000km from the pit head should use coal with an ash content of less than 34%.

This percentage was fixed after studies undertaken by DuetscheMortanConsult (Germany) and Mott. Macdonald (UK) indicated that when India coal was cleaned to a level where the ash content was 34%, it retained in general 95% or more of its energy.

The mining and power companies have resisted the implementation of the recommendations as the transportation costs do not offset the incremental costs incurred from washing the coal.

30

Coal washeries – economics

Capex for setting up 1m tonnes of capacity – Rs100-150m.

Coal-washing costs.– Power – Rs90-100/tonne – Cement – Rs100-150/tonne– Sponge iron – Rs150-170/tonne – Steel – Rs250-300/tonne

The existing capacity-utilisation rate on an aggregate basis is 60%.

31

High ash content – the need for coal washing

India coal has a high ash content as it is supposed to have been formed according to the drift theory. In addition to the ash, there is dilution in the quality of coal due to mining and related activities.From 1970-71, open-cast mining accounted for only 20% of production.Currently, about 85% of coal is produced through open-cast mining.Due to dilution, the quality of coal (GCV) has been deteriorating.– In the early 1960s the GCV was about 5,900 kcal/kg– By the 1970s the GCV was about 5,250 kcal/kg– By the 1980s the GCV was about 4,200 kcal/kg– By the 1990s the GCV was about 4,000 kcal/kg– Currently, the GCV is about 3,500 kcal/kg

32

Coal washeries in India

33

CIL65.1%

SAIL11.7%

DPL4.5%

TISCO15.9%

Others2.8%

CIL18.9%

Aryan 30.0%

Gupta 16.9%

Global coal4.5%

Bhatia Int7.6%

JSPL5.3%

Indo Unique Flame4.8%

Others12.1%

Existing coking coal washing capacity Existing non-coking coal washing capacity

Aryan Coal (Not listed) is the largest player in India’s coal-washery business with an operational capacity of 32m t.p.a., which will be scaled up to 58m t.p.a. by 2012 (including subsidiaries and capacity under construction).


Geographic spread of the coal washeries

34

Andhra Pradesh 3.6%

Chhattisgarh 33.6%

Jharkhand 14.9%

MP0.3%

Maharashtra 36.9%

Orissa 6.7%

Uttar Pradesh 4.0%

Spread of coal washeries by state


Issues faced by the coal washeries

The availability of basic infrastructure: land, water, and power.The disposal of rejected coal.– The availability of land for setting up washeries– Cleaning coal to lower its ash content results in a loss of heat value from the rejected

coal, ie, the quantity of rejected coal currently is far in excess of the ash percentage. Maintaining the quality of clean coal: there are no controls on the quality of the input coal.The development of reliable and accurate sensors to monitor coal quality.Cleaning and dewatering of ultra-fine coal.The desulphurisation of high-sulphur coal. The application of dry-coal beneficiation processes for arid regions.

35

HurdlesThe development of coal washeries in India has not kept pace with the rise in demand for coal.– Assurances on the supply of quantity and the quality of coal (both physical and chemical

from the linked source)– The availability of land for setting up washeries– The availability of land for the disposal of washery waste, ie, rejected coal– Access to the necessary infrastructure, such as power, water, and railway sidings

36

The sourcing of coal from one company (CIL mostly) and having it washed by another agency has inherent risks.

— Adds to the cost of fuel, not passed through for regulated tariffs— Private capacity that is set up already — As a result of the possibility of the illicit transfer of coal between the coal-washing

companies and the coal suppliers, CIL would record a loss

Annexure IThe Red CorridorAn impoverished region in the east of India that experiences considerable Naxalite Maoist militant activity.

37

Source: Wikimedia Commons

Annexure II Drift theoryThis theory suggests that plant material was transported by stream action from their place of growth and deposited in places such as lakes or the sea like other sediment. The coal seams of India are of drift origin. The drift theory may be summarised as follows. – The plant material from the coal forest was transported by water and deposited in

lakes or the sea just like other sediment – During transportation the various materials were sorted out as usual, in accordance

with their specific gravities. – Pure coal seams were formed in places where only the lightest material (plant

material) had access– A stream with shale bands was formed in places where a temporary change in the

water currents and hence the nature of sediment occurred – Rapid and frequent oscillatory earth movements gave rise to several coal seams, one

above the other, separated by sediment38

Appendix – coal washeriesPre-dominant separating principles.– Separation based on the differences in the relative density (RD) of coal and the

associated mineral matter; pure coal has an RD of about 1.3 and associated mineral matter commonly has an RD of more than 2.2

– Separation based on differences in the surface properties of coal and the associated mineral matter; coal is hydrophobic, while the associated mineral matter is generally hydrophilic

Pre-dominant processes.– Heavy/dense-media separation – based on simulating the effect of using a liquid of

appropriate density to effect a float/sink separation of coal from the associated mineral matter

– Jig washing – a process that relies on the pulsation of water through the particle bed to stratify particles of different density. Higher-RD shale particles form the lower layers, and are separated from the clean coal by use of a shale-discharge system

39

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DISCLAIMER (Cont’d)Research Analyst Conflicts: For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at http://www2.us.daiwacm.com/report_disclosure.html. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.Research Analyst Certification: For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at http://www2.us.daiwacm.com/report_disclosure.html. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months."2": the security is expected to outperform the local index by 5-15% over the next six months."3": the security is expected to perform within 5% of the local index (better or worse) over the next six months."4": the security is expected to underperform the local index by 5-15% over the next six months."5": the security could underperform the local index by more than 15% over the next six months.Additional information may be available upon request.

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Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.109Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan



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