Uncertainty Over Allotment Of Gare Palma Mine Keeps JSPL On The Edge

Even as the Coal Ministry considers allotting coal mines for various end-uses, uncertainty prevails over the Gare Palma mine in Chhattisgarh.

The ministry, in a notification dated Dec. 13, announced the allotment of as many as five coal blocks while stating that six coal mines were under consideration for allotment. “In the auction process, the successful bidders for all the mines except Gare Palma IV-1 have been recommended by the Central Government,” the ministry said in a statement.

The notification may come as a disappointment for Jindal Steel and Power Ltd. as it had emerged as the highest bidder for the Gare Palma IV-1 mine, with a bid price of Rs 230 per tonne—a premium of nearly 53 percent over the government’s base price. The ministry had made no mention about allotment of the mine in question even in an earlier notification dated Dec. 5.

BloombergQuint has emailed the Coal Ministry queries on the final status of allotment of the coal block.

The Gare Palma IV-1 block has a peak capacity of 6 million tonnes a year and is located near the JSPL’s steel mill and captive power plant. The block would ensure coal security for the next 10-12 years, VR Sharma, managing director of the company, had said in an interview to BloombergQuint last month.

The coal block would also help the company save costs and boost its operating profit per tonne. The auction price of Rs 230 per tonne would roughly lead to a saving of Rs 800-1,000 per tonne compared with the e-auction price, according to the company.

At the lower end of Rs 800 a tonne, that could result in a potential saving of Rs 480 crore at its peak capacity of 6 million tonnes a year, according to BloombergQuint’s calculations. That’s nearly 5.5 percent of Bloomberg consensus Ebitda estimate of Rs 8,860 crore for FY21.

The company had said in its annual report for 2015-16 that it failed to emerge successful even after emerging as the highest bidder for Gare IV-2 and IV-3 and Tara coal blocks in 2015 on the grounds that the bids didn’t reflect the fair value of the company.

Uncertainty An Overhang On Stock

With no outright rejection by the ministry, the uncertainty over the block allotment remains an overhang on the company’s stock. In response to queries on this latest notificationthe company told BloombergQuint that it isn’t aware of a bid rejection for Gare Palma IV-1 captive mine and believes that the government will fairly decide with regards to e-auction for coal blocks.

The base price was decided by the government, Sharma told BloombergQuint in an emailed response, adding that they must have considered all the facts as it isn’t a virgin mine. The company bidding for the mine at a premium of 50 percent won’t affect its operating profit, he added.

Shares of Jindal Steel and Power have declined nearly 10 percent since this issue came to fore this month. Analysts expect JSPL’s stock to remain under pressure till clarity emerges. Though Amit Dixit, assistant vice president-research of Edelweiss Securities, said he expects earnings for FY20 to improve over the previous fiscal on the back of various cost initiatives and visible production uptick.