Captive Coal Mining

Issues & Challenges

Sanjeev Aggarwal,
Managing Director, AES Chhattisgarh Energy
March 5 2009
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Captive coal mining - Agenda
Historical Perspective
Policy Issues
Implementation challenges
Commercial challenges
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Captive Coal Mining A historical perspective
Under the Coal Mine Nationalization Act (1973), Coal Mining was exclusively
reserved for public sector
Subsequent amendments & notifications allowed select end user industries to
engage in captive coal mining
Iron & Steel Industries (1976)
Power generation (1993)
Cement Production (1996)
Two modes of dispensation
Captive dispensation: For a specified end-use to both Private & Govt.
companies
Govt. dispensation: No end use restriction but only to Govt. companies
Since 1993, a total of 198 coal blocks have been awarded to various private &
Govt. companies of which 128 have been through Captive Dispensation and the
rest through Govt. dispensation route.
However, only a handful of these mines are under commercial operation.
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Captive coal mining
Historical Perspective
Policy Issues
Implementation challenges
Commercial challenges
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Captive Coal Mining Policy Issues
Allotment of undeveloped or remote coal blocks
Selection guidelines stipulate that the blocks allotted should be at a
reasonabledistance from existing mines and projects of CIL
However, most of the allotted blocks are either relatively remote or
unexplored/regionally explored.
Such mines, generally, are geologically also very challenging.
Mines with infrastructure created are rarely handed over for allotment.
Development of initial mine infrastructure (roads etc.) or the prospective
exploration takes significant amount of resources and time.
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Captive Coal Mining Policy Issues
J oint Allocation of Mines
About 40 mines since 1993 (most of them in recent past) have been
allocated on a joint basis, some times to as many as 8 parties.
Due to difference in the schedules of end use projects, time-bound
development of these mines becomes very challenging.
Varied economic interests of the allocatees makes it difficult for optimal
development of the mines thereby affecting the utilization of the resources.
The technical requirements of end-use projects (coal grade, blend, quantity
etc) might also be different adding to the challenges.
Due to the above factors, projects with captive mines allocated on a joint
basis attract less favor with financiers/lenders in the market.
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Forest Clearance/Prospecting License for unexplored blocks
For unexplored coal blocks, developers require prospecting license (PL) to
be able to do prospective exploration.
Grant of PL is a long drawn process involving both State & Central Ministries
and typically takes 1 year.
Forestry clearance (FC) for prospecting is an equally tedious process (12-15
months) involving both State and Central ministries.
For unexplored blocks, the PL and FC for prospecting should be handed
over to the developer upfront which would save a significant amount of
development time.
Captive Coal Mining Policy Issues
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Captive coal mining
Historical Perspective
Policy Issues
Implementation challenges
Commercial challenges
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Captive Coal Mining Implementation Challenges
Acquisition of coal mine land
A number of projects under development facing delays due to opposition
from local population
Even otherwise, the land acquisition process itself is a fairly tedious one
involving 12-15 months of time only for the approval of the application.
In our opinion, opposition to land acquisition is mostly due to inadequate
compensation or ignoring of long term interests of the PAP.
With a robust relief and rehabilitation package and generation of long term
employment opportunities, villagers/local population are amenable to large
scale industrial projects.
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Captive Coal Mining Implementation Challenges
Environment & Forestry Clearance
Typical timeframe for Environment/Forestry clearance ranges from 18-24
months.
No time-bound accordance of these clearances places a significant
uncertainty in the project development schedule.
On the other side, the developer risks forfeiture of BG/cancellation of
allotment if the clearances are not obtained within the timeframe specified in
allotment letter.
The Government needs to really fast track the Environment/Forestry
Clearance process for the coal mines
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Captive Coal Mining Implementation Challenges
Other significant challenges in mine development
Understanding the current mining technologies Most players do not have in-
house mining expertise.
Understanding of optimal business model - Whether a J V, MDO or Alliance
partnership?
Equipment Challenges Significant lead times of procurement & shortage of
skilled man-power to operate and support the equipment fleet and mine
operations.
Accurate assessment of development costs
Managing the safety risks during development/operation phase
Financing challenges Changing capital environment plus significant
amount of capital requirements; increased equity and debt costs.
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Captive coal mining
Historical Perspective
Policy Issues
Implementation challenges
Commercial challenges
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Captive coal mining Commercial Challenges
Mine Owner
Fuel Supply (MDO) Agreement
CMP
Mine Dev & Operation
Mine
Mine Owner Alliance Agreement
Services Agreements
CMP
Alliance
Mine Dev & Operation
Mine
Fuel Supply Agmnt
Mine Owner
CMP
JV
Mine
Mine Dev & Operation
Equity participation
MDO Model
Contractor bears essentially all kinds
of risks
Contractor provides all capital
necessary for development and
operation of mine
Typical commercial arrangement is
that of a contractually agreed fixed rate
Significant premium demanded by
the contractor leading to higher prices
J V Model
Separate J oint Venture is created for
coal mine development and operation
Capital contributed by the owner and
contractor in proportion of their equity
Transfer price of coal becomes an
issue
Additional tax liability because of
sales tax
Risks shared between the owner and
the contractor
Alliance Model
An alliance between the Mine owner
and the coal mining partner is created
Financial obligations for construction
and operation are on the balance
sheet of owner and partner
Alliance board comprising of
representatives from both parties takes
decisions
Commercial arrangement typically is
that of cost +mining fee +pain/gain
share
Different business models in contract mining
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Captive Coal Mining - Commercial Challenges
Contract Mining Issues
Contract mining in India is still a relatively new concept.
The market has still not evolved; risk sharing between parties is not well-
defined or optimal.
Mine owners typically load all kinds of risk on the contractor (MDO).
Such aversion to risk leaves other business models like a J V or an Alliance
partnership unexplored (which can provide better risk sharing mechanisms)
Mine owners are focused on the lowest per tonne coal mining cost which can
put safety and environmental aspects in jeopardy.
Excessive focus on lowest mining cost can also put optimal planning of mine
at risk.
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Captive Coal Mining - Commercial Challenges
Absence of international players in contracting business
International players have tried to gain foothold in the contract mining
business in India over the last few years.
However, most of them have had limited success due to :
Excessive loading of risk in their favor
The bids have been evaluated on a single per tonne cost basis rather
than the value added basis
Absence of international players leaves the Indian coal mining market poorer
of best business practices and technical expertise.
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Thank You