CCEA Approves Methodology For Coal Block Auction

Finally, the government seems to have woken up and took some positive step. Yesterday the Union Cabinet approved the methodology for auctioning coal blocks, enabling the government to allot coal mining licenses through competitive bidding for the first time. The report suggest, according to the methodology, auctioning would take place for fully explored coal blocks as well as regionally explored blocks after ascertaining the geological data.

The Cabinet Committee on Economic Affairs (CCEA) approved the production-linked payment on rupee per tonne basis, plus a basic upfront payment of 10 per cent of the intrinsic value of the coal block. The intrinsic value of coal block will be calculated on the basis of net present value of the block arrived through Discounted Cash Flow (DCF) method. The DCF method relates the value of an asset to the present value of expected future cash flows of the asset. It is based on the principle that for any initial investment an investor will assess future cash flows from that entity to provide a minimum return.

To help benchmark the selling price of coal, the international freight-on-board price from the public indices like Argus/Platts will be used to calculate the mine mouth price. As a buffer against short-term volatility, the average sale price will be calculated by taking prices of the last five years.

The best part has been, for the power sector, the CCEA directed providing 90 per cent discount on the intrinsic value for tariff-based bidding, which will help in rationalising the electricity tariff. We feel the news is positive for the power companies. However it needs to be seen how the companies fund the acquisition.  We expect a positive impact on the JSW Steel, JSPL, and Tata Steel etc. Even the power generation companies like Tata Power and Adani Power is also expected to get benefited. 

As regards the methodology, to ensure early operationalisation of blocks, there would be an agreement between the coal ministry and the bidder to perform an agreed minimum work programs at all stages. There would be development stage obligations in terms of milestones to be achieved such as getting mining lease, obtaining environment or forest clearances, etc. The bidder will have to give performance guarantee during the developmental stage. The successful bidder will get two years for exploration and five years for block development.

The new auction blueprint allows relinquishment of a block without penalty, provided the bidder has carried out minimum work program. The environment ministry will review the details of the coal blocks before they are up for auction. However, final approval will be subject to the statutory clearances under the law. However it needs to be seen how fast the green clearances are provided. Further the companies seek some clarity on the land acquisition front. So though the news is positive, we feel more clarity is required on the same.