Is India the next growth opportunity for Indonesian Coal Miners? Vol 118
Introduction
The Indonesian Mines Department [ESDM] is keen to issue new mineral and coal tenements by awarding such areas to the Government or to State Owned Enterprises, and in some cases to auction blocks to Private Investors. Unfortunately, the blocks previously offered by the auction system were not taken up by domestic or foreign private investors. There are few opportunities for Indonesian coal miners to grow their domestic coal business, wherein some miners have already started to invest in offshore mines.
On the 18 June2020, the government of India announced the coming auction of 41 coal blocks with combined reserves of 16.9 billion tons. The auction is designed to entice private investors, with a reduced upfront amount, the facility of adjustment of upfront amount against royalty, liberal operational efficiency parameters, and 100 per cent FDI. The auction process, allows for a revenue-sharing basis as a percentage of revenue share (final bid) that has to be paid to the government on the sale of coal, as compared to the current mechanism of paying fixed rupee per tonne.
This article is designed to give a brief introduction to the India coal auction system. Potential investors for the India coal industry are advised to seek appropriate professional and legal advice.
The India coal initiative.
India has the world’s fifth largest coal reserves. India’s coal production for 2018-19 was 730 million ton, with domestic consumption at 965 million ton, that required imports worth US$ 24.6 billion. A series of minor reforms did not resolve the problem of sub-optimal coal production. Therein India decided to unshackle to coal mining industry and move from a protectionist regime to a free market economy.
The India Coal Mines act of 2015 introduced the auction system for captive mining. In February, 2018 provisions were introduced to allow coal mines to produce, and more freely sell or export coal. In August 2019 further liberalization was introduced wherein 100% foreign direct Investment (FDI) was allowed for commercial coal mining in India. Private sector participation was sought to provide faster expansion of the coal industry, reduce imports, and have spin off for adopting modern technology to raise the efficiency of the broader coal industry. The absence of end-use conditions in the guidelines is seen as a positive factor for commercial miners. Long delays in getting regulatory approvals, challenges in land acquisition and limited infrastructure are often cited as reasons for slow growth in the coal sector.
Recent Indonesian Review of India’s Coal Industry.
On Friday 26 June, Petromindo.com & Coal Asia magazine presented a webinar “Understanding Indian Coal Market Outlook – What are the impacts on Indonesian coal?”.
Hendra Sinadia, Executive Director of Indonesian Coal Mining Association mentioned that Indonesian coal plays a significant role in blending down India’s very high ash coals to meet Indian environment requirements and boiler efficiencies.
Prashant K. Goyal, CEO of OPG Power Generation Pvt. Ltd. India’s power is produced by the State, Central and Private sectors, with Coal responsible for 53.65% of the power, however the COVID 19 has seen India power consumption drop by about 23%. India’s overall coal production in 2019 was 729 million ton. Coal India had set a 2020 target production of 710 million ton. In 2019 India imported 103.64 million ton of thermal & 1.89 million ton of coking coal from Indonesia that is used in the power, cement, and other industry sectors. On the 18th June 2020 the Indian Government introduced incentive privatization policies for Indian coal mines. The vision is to make India self-reliant on domestic coal, plus hope to develop coal gasification etc. This policy shall include 41 coal blocks to be auctioned that have combined reserves of 16.9 billion ton and may produce 221 million ton / year starting in the next 5 years. Other coal policies now allow inland coal power plants to use higher ash coals (less Indonesian coal for blending). Average 2019 coal price in India was $34.99/ton, but the COVID 19 impact saw an average price for 2020 as low as $20.56/ton. India’s ambition is to produce 1 billion ton of coal per year.
Hendra Tan, Deputy Chairman of Indonesian Coal Mining Association [ICMA]. The Indian Government is looking to curb coal imports, by reviewing blending patterns, power plant ash controls, and privatization of coal mines. Indonesian coals imported to India are typically CV 3,600- 5,200 GAR, TS 0.1-1.2%, Ash 6 – 8%, Moisture 15-38%. Laned Indonesian coal is price competitive to Indian coal. Indonesian coal accounts for 60-70% of Indian coal imports.
James Stevenson, Senior Director of Research and Analysis for coal, Metals & Mining HIS Market & Abhishek Rakshit, Principal Research analysis, HIS Market. The COVID 19 is producing a global recession, wherein India’s GDP is expected to fall from +4.2 in 2019 to -6.3 in 2020 but may recover in 2021 to near 2019 levels. HIS Market is tracking Indian growth through consumer indicators, power consumption, coal stocks, along with coal transport (inland rail) competitive fuels reflecting the decline of imported Indonesian coal etc. Long term trends are likely to recover slightly, but 2019 may have been a peak year for importing Indonesian coals.
India Standard Coal Tenement Document.
The Indian governments bidding for new coal tenements incorporates a “Standard Tender Document” for the auction of coal mines, as per the 2015 coal mines special provisions act, and mineral development regulations of 1957. This 68-page document includes the headings of Definitions, Introduction, Tender Process, Eligibility Conditions, Instruction to Bidders, Bid Security, Performance Security, Fraud and Corrupt Practices, Other Provisions along with several Annexures that include the mandatory work program, coal mine development and production agreement, plus various administrative aspects associated with the on-line bid. The documents are available for downloading from the website WSTC. https://www.mstcecommerce.com/auctionhome/coalblock/index.jsp
The first document is free, and contains the standard tender document plus mine summaries. The second requires a payment of INR 5,000,000 [USD 67,000] for the bidder to download the specific tender documents. A two-stage tender process requires the financial bid for the initial offer and the final offer, along with the technical bid. The first stage bid includes a Bid Security. The procedure for evaluation, ranking and of bids is outlined to identify the Preferred Bidder, along with the process for the Central Government to sign the Agreement. The successful bidder shall then provide 1) the Performance Security, 2) pay fixed amount for; – the compensation of land and mine infrastructure, cost borne by the prior allottee for the preparation of geological report, cost borne by prior allottee for all licenses, permits, permissions, approvals, consents, preparation of mine dossier including block boundary and financial valuation along with applicable taxes. Subsequent upward or downward revisions of the fixed amounts shall require addition payment or refund. 3) Fully explored mines require a first instalment payment of the upfront amount, as set out in the tender document. A pre-bid conference is available, and site visits are encouraged. There is a process for tender document queries and clarifications. The bid process is estimated to start on 18 June 2020, with bid due date 18 August 2020, with evaluation thereafter.
The value of the geological reserves and upfront amount is determined as 0.25% of the value of the estimated coal reserves, subject to range of reserves and coal quality, as set out in the tender document. The upfront amount is payable in 4 equal instalments after 40 days, 6 months, 9 months and 12 months that are linked to granting of execution of certain operating permits. Further periodic monthly payments are required based on Final Offer, Royalty, and a complex formula related to Sale price of coal. A rebate from the final offer is available as an incentive to produce coal earlier than scheduled. Other incentives are offered for coal gasification or coal liquefaction. There seems to be no restrictions on coal sales.
The bidder is required to place a “bid security” amount for 60 – 270 days, as part of the technical bid. The bid security amount is included in the bid document, as calculated by 1) 20% of the upfront payment for fully explored mines, or 2) as 25% of the estimated exploration expenses for partially explored mines. Bid security is returned to all bidders without interest, after the signing of the agreement by the bid winner.
For Fully Explored Mines, the Successful Bidder shall provide to the Nominated Authority an irrevocable and unconditional guarantee from an acceptable bank, for the performance of its obligations within such time. The Performance Security shall be an amount which is 65% of aggregate of: (a) one year royalty computed on the basis of peak rated capacity of the Coal Mine as per the approved Mining Plan and (b) one year revenue, payable to the State Government with respect to the Coal Mine computed on the basis of peak rated capacity of the Coal Mine as per the approved Mining Plan. For Partially Explored Mines, the Performance Security shall be equal to 25% of the estimated exploration expenses based on Mandatory Work Program. The amount of Performance Security shall be revised after receipt of an in-principle approval of Mining Plan, which shall be computed in accordance with a set formula. The amount of the ongoing Performance Security for fully explored mines shall be revised on an annual bases in consideration of the National Coal Index, royalty and other factors.
Under Other Provisions, there are generalize obligations for exploration and production (set out in final tender document), revision of mining plans, flexibility in production, revenue payable to the government in case of shortfall in coal production, relinquishment etc.
Coal Blocks.
The link https://www.mstcecommerce.com/auctionhome/coalblock/index.jsp takes us to the Indian Ministry of coal web site that includes a list of coal mines for auction, summary of coal mines, standard tender document etc. There are 41 coal mines for auction with information on region and status as fully or partially explored. The mine summaries are PDF download files giving simple details on block location (include coordinates) logistics to rail, road, airport plus size in forest and non-forest area, geomorphology, exploration number of boreholes and total meters drilled, seam strike & dip plus table of seam thicknesses, depth and geological reserves of proved and indicated status, along with coal grade. Further details are given on name of previous allocation, tentative peak rated annual capacity, and status of main approvals. A simple concession map is provided along with coordinates.
In late July the number of coal blocks was reduced to 40. Pending the court cases filed by the state governments, the auction process will continue. If any blocks are passed in, they will be reviewed and offered again with more blocks at a latter auction time.
Concerns with the coal Development and Production Contract.
As with all new regulations, commentators seek clarification on various implementation scenarios. These include the dynamics around revisions to the final price offer, changes in equity over the 30-year contract tenure, changes to various laws that may impact on the contract, termination issues, adjusting changes in market coal price and demand with committed annual schedules of production and sales.
Some geoscience professionals are concerned about the Indian Governments derivation and status of the reserves and associated valuations. The reserves quoted in the blocks are defined as per the Indian Standard Procedures, as modified in 2017 that incorporates some elements of the United Nations coal reserve classification system. There is some concern that the exploration Standard Operating Procedure (SOP), for QA/QC protocols, drill spacing and classification methodology are not transparent for each block. Furthermore, the Governments expected development schedule (a significant bid factor) is seen to be overly ambitious.
Indian government positive note.
In mid-June 2020, Prime Minister Narendra Modi India announced that his administration was ending a four-decade state monopoly on the mining and selling of coal by auctioning to private companies 41 mines across the country. India’s Coal Minister Pralhad Joshi said that just a few days into the auction process of coal blocks to commercial mining operators, 1,140 parties have shown interest in taking part in this new chapter in the country’s mining history. According to local media (5 July), 26 companies have already bought tender documents for about $6700 each and 10 firms expressed their interest in visiting the mines.
The offering of coal mines to private capital has two main objectives: solving a fuel shortage that threatens to choke the nation’s industrial activity and boosting India’s economy to help the country recover from the economic toll of the coronavirus pandemic.
Caution from India media.
Industrial action by trade unions, Supreme Court cases, plus agitation to block environmental clearances are working against this auction initiative.
Nidhi Jamwal, environmental editor of the Gaon Connection publication, 22 June, reported that 3 out of the 5 states are opposing the auction of coal blocks on environmental grounds. At least 8 of the 41 coal blocks are subject to high court challenges due to proximity to tiger and elephant habitats, plus some tribal rights.
Concern around the coal block auction has been raised by one state chief minister. “Due to COVID-19 pandemic and national/international travel restrictions, many domestic/foreign players may not be able to participate in the proposed auction process… many domestic enterprises are facing financial liquidity crunch in the current scenario of slowed down economy”.
Tim Buckley, director of energy finance studies, Australia / South Asia, Institute for Energy Economics and Financial Analysis (IEEFA) made some negative comments in an interview with Down to Earth in late June 2020.
“India has exceptionally low wages for its coal miners. It is entirely sensible for India to modernise its work practices and progressively bring in global coal-mining technologies. However, this progressive automation / modernisation and capital for labour substitution would have huge negative implications for the Indian workforce and would raise the cost of production”.
The growth of new coal power plants in India is slowing to around 4.3 GW per year. Global investors are trending away from financing new coal power projects, wherein the Institute for Energy Economics and Financial Analysis (IEEFA) does not expect almost any foreign interest to emerge in this auction process. Several of the world’s largest mining groups have recently become less interested in new coal ventures.
Opportunity for Indonesian coal Investors.
It is apparent that the main investors interested in the India coal auction may come from companies already familiar with, and committed to the coal industry. This list may include investors from China, Russia, Poland, South Africa, Colombia, Indonesia and Australia. Indonesian investors may have some advantage wherein they may be less put-off by India’s track record of tedious permitting, and slow land compensation factors. Indeed, there are a few Indonesian coal companies with close links to India that may smooth the business culture shock effect. Indonesian coal companies are faced with a government that has publicly stated its long-term strategy to reduce the Indonesian coal production and exports, wherein the opportunity for Indonesian coal companies’ growth has already seen investment into the Australian mining industry. Perhaps the new India coal blocks may provide further opportunities for Indonesian companies to go-global.