Coal India: Made to mine

Somnath Dasgupta        Print Edition: August 21, 2011

What business does the government have mining coal? Quite a lot, if the Coal India's output is anything to go by. After the reforms of the 1990s, the private sector clamoured for allocation of mining blocks, citing CIL's failure to meet demand.

So far, the government has allotted 48 billion tonnes of reserves to around 208 private parties. Their total production is just 30 million tonnes a year. In contrast to this, CIL, with 65 billion tonnes of reserves at its disposal, extracts 450 million tonnes a year.

Coal India has the highest ratio of reserves to production among global peers

It sells coal at a 40 per cent discount to the cost of imported coal, so there is a huge upside

Tougher environmental rules have affected expansion

Land acquisition is also an issue
Coal India's Chairman Nirmal Chandra Jha, who has been with the company for 37 years, told BT recently: "Everybody feels that only Coal India can mine coal." But, over the past few years, CIL, like every other mining company, has been finding it increasingly difficult to get environmental clearances and to acquire land.

Jha admits that the reforms injected a sense of competition. "When Coal India was formed, the government used to tell us to mine at any cost," Jha recalls. Following the reforms of 1991, the government gradually stopped budgetary support. The first big break came in the mid-1990s, in the form of a World Bank loan to fund 24 open-cast projects. "That expansion gave us a boost and our profits started surging," says Jha.

Mukesh Agarwal, Senior Director of Research at Crisil, says that Coal India has the highest reserves and reserves-toproduction ratios among its peers, which provide enough room to ramp up.

"Also, operating margins are comparable to its peers, even though realisations are at a discount to international prices," says Agarwal. According to Microsec Financial Services, Coal India is a better investment bet than thermal power utilities, because it controls their fuel, in this case coal. This control gives it a high return on equity of 40 per cent.

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