Banking on coal
Private investors, Coal India and the government are exploring ways to make coal mining more bankable as the heatwave pushes up demand for power
In the middle of the non-stop heat blast raging across North India since the end of March, leading mining companies, including Adani Enterprises, Vedanta and Essel Mining, have informed the coal ministry that they will be keen to add sizable chunks of investment to expand coal production. This means they will need more bank financing — marking a reversal of the climate change programme. And the government is keen to walk the extra mile to make it happen.
In early May, industry leaders met Coal Minister Pralhad Joshi and his team at an industry meet and sought permission to reopen 20 abandoned mines of Coal India Ltd (CIL). Vinay Prakash, executive director and chief executive officer (CEO) of Adani Enterprises Ltd, said he is hopeful of reaching a target of mining 50 million tonnes (mt) in FY23 (from 27 mt in FY22), once the government support comes in. On the same note, V Srikanth, CEO (Mines), Vedanta Ltd, said “we have been consuming 40 million tonnes of coal per annum in the past two years, so we can feel the pinch” of coal shortage.
The companies assured Joshi that they wish to become joint development partners with CIL to renew coal production from the now abandoned mines. The government wants to set up a revenue-sharing formula with the private sector, using the latter’s expertise to expand production from these mines quickly.
The challenge for the companies is how to make the banks finance the projects.
Unlike other minerals, no banks wish to hold coal as a collateral to secure their loans. On coal, the State Bank of India, for instance, does not provide details of its financing, and neither do others like the Bank of Baroda. In their investor presentations, both banks have clubbed coal and related investments under “other industries”, which is too broad a package to offer any clue. The shareholders of these banks abroad are pushing them to cut back on exposure to coal.
If coal cannot be a collateral, the other option is to mortgage the land to banks. This is tricky. Coal-bearing areas are governed by the Coal Bearing Act of 1957, which says all these parcels of land belong to the government. Unless that Act is repealed, banks can have no right over the land. This is the same challenge miners have faced when they have taken coal mines on auction for commercial coal mining. It explains, for instance, why in the four tranches of coal mine auctions since June 2020, only 28, a little more than half of the 47 mines, have found bidders. Without finance, the necessary insurance cover is also not available, which has made most of the mines unviable.
Without additional finance, it is impossible to raise production from private mines. In FY22, private mines added 20.39 mt to their production of 69.18 mt, a rise of almost 30 per cent. But these are captive mines and more growth will need better machines, which means more capital. If that capital comes through, it will mark a significant change for the sector, but not a surprising one, considering global trends. A Bloomberg report (April 2022) notes, “Nearly every major metal and mineral has hit a record in the past 12 months, fuelling profit and share price gains across the sector.”
Ujjwal Chatterjee, former chief financial officer at Tata Sponge and now a consultant on commercial coal development, said the government may have already “missed the bus in pushing for development of thermal coal. However, the current crisis gives an opportunity to provide competitive finance for the sector”.
Despite Chatterjee’s scepticism, the government is now willing to explore alternatives. The heatwave and the enormous rush for coal have made it easier to go for bold policy options. A combination of this hope and the evident rush for coal at India’s 181 power plants have driven valuations up for energy-related companies in the stock market.
In the last 30 days when Nifty 50, the benchmark market index at the NSE, has dipped 9.69 per cent, the few sectoral indices that have done better are broader energy and the public sector enterprises. Of the 20 state-owned companies in the list, 15 are from the metals, mining and energy sector (see table), including coal.
Investors are rediscovering the joys of mining and energy sectors, principally coal and gas, in the stock market. Once they push valuations up, it is a short walk to the next stage, to get banks and other financial institutions interested and reach out to the government to explore alternatives.
To make CIL’S abandoned closed mines (with a potential of 100 mt) look financially viable to the banks, Coal Secretary Anil Kumar Jain offered interesting alternatives to mining companies. So far the plan was that money from the sale of coal would be held jointly by CIL and the miner in an escrow account. The companies are reluctant to do so since they feel they will have to “beg” CIL to get their own revenue back. Instead, minister Joshi said the government could replace the mechanism with a bank guarantee. Once the companies have the assurance of sale and a contract with CIL to show the banks, financing for mines will flow in and with fewer questions for everyone concerned.
These proposals are, therefore, looking better for the domestic banking sector to renew its interest. This is also because investment sunrise sectors like renewables have run into regulatory problems. A parliamentary panel has flagged the problem of dipping investment in renewable energy, asking the government to encourage the setting up of green banks and mandating renewable finance obligations to lower the cost of financing new energy. “The coal sector has come to play a central role in the Indian energy landscape,” said Jain. He added that once these chinks are ironed out, in the next stage, CIL will open nearly a hundred more such closed mines.