CIL seeks to buy into operational foreign coal mines

KOLKATA (miningweekly.com) – Coal India Limited (CIL) plans to enter into strategic equity investment and production sharing agreements with the owners of operational coal mines outside of India, rather than the outright acquisition of greenfield coal blocks, as it had previously attempted.

CIL had appointed a merchant banker to aid it in identifying assets overseas, with the mandate to target only coking coal and low-ash thermal coal in countries like the US, Colombia, South Africa, Australia and Indonesia.

According to a Coal Ministry official, the miner’s preference is to acquire coking coal assets as India lacks the techo-economic capacity to increase its domestic coking coal production, particularly in view of rising demand from the steel sector.

However, to avoid unsuccessful bids, as has been the case in the past, CIL reckons that strategic equity investment in operational coal mines, backed by long-term production buyback agreements with overseas asset owners, will enable it to derisk its investments, the official adds.

It was pointed out that strategic equity investment and production sharing will help CIL avoid the problems it had previously faced when it tried to acquire a greenfield project in Mozambique.

Last year, CIL withdrew from developing the A1 and A2 coal blocks in Tete province, in Mozambique, which it had secured in 2009. After years of exploration and an $80-million spend, it was forced to conclude that the blocks did not offer any deposits that could be categorised as "viable coal of any commercial value".

According to bid documents for the appointment of a merchant banker, Mozambique does not figure among the target countries for investments by CIL.

With coal prices on a recovery trajectory and the new US administration’s commitment to reviving the ailing coal industry in that country, India is seeking to re-enact the "almost done" deal with US major Peabody Energy, which, ultimately, fell through. CIL had previously proposed to pick up 10% equity in Peabody with the Indian miner securing access to coking coal from Peabody’s mines in Australia. But, when Peabody went into bankruptcy, the deal fell through.

Coal Ministry officials reckon that with coal prices trending upwards and the Donald Trump administration committing to greater bank fund flows into the US coal mining sector, CIL’s prospects of entering into a production sharing agreement with US coal miners have brightened.

Meanwhile, the officials cite "unconfirmed media reports from Indonesia" that coal mines in Kalimantan province have halted exports of dry fuels from the mines in the region, but no reasons for the halt have been given.

With Indonesia being one of the major sources for Indian coking coal imports, such disruptions for "inexplicable" reasons cause major supply chain problems for Indian domestic steel producers, the official says.

However, such disruptions in transactional merchant trade in coal could be circumvented through equity stakes and long-term production sharing agreements in overseas coal assets, officials add.