With Mahatamil, Lanco ‘has bitten more than it can chew’

Lanco Infratech may have bagged the Mahatamil project, but analysts suspect the company may have got its math all wrong.
Mahatamil is a joint venture of Tamilnadu Electricity Board (TNEB) and Maharashtra State Mining Corporation (MSMC).

It was allotted the Gare Palma-II coal block in Raigarh district of Chhattisgarh. As per the venture agreement, Tamil Nadu has a 77% share in the coal produced from the block while Maharashtra has 23%.

Post the allotment of the block, Mahatamil sought bids from the developers for developing and operating the mine. The successful bidder would be the mine developer and operator.

About eight industry majors including Larsen & Toubro, GVK, Reliance ADAG, Jindal, GMR and Sterlite, apart from Lanco, submitted bids.

The joint venture, in addition to the development of the block, also mandated the successful bidder to set up a power plant making use of the coal produced.

Lanco offered a premium while everyone else sought a certain amount for each tonne of coal produced.

The coal mine is estimated to have a coal capacity of about 15 million tonne per annum. While about 23% of the coal produced (about 3.45 million tonne per annum) would be supplied to MSMC, the balance 11.55 million tonne has to be converted into power by Lanco by setting up a power plant. Lanco said it would set up a 2,000 mw project.

But the company remains silent on the terms of the deal.
According to sources, Lanco has agreed to pay about Rs112 per tonne of coal produced to the joint venture company, while rivals sought between Rs819 per tonne (L&T) and Rs175 (Sterlite).
Back-of-the-envelope calculation show this can hurt Lanco, analysts said.

“The deal is for 25 years, meaning Lanco will pay the joint venture Rs112 per tonne extracted for that long a period. Secondly, the company’s statement has not explained the way the capital expenditure would strain the balance sheet,” an analyst with a domestic brokerage, who did not wish to be named, said.

To boot, the power generated has to be supplied to Chhattisgarh at two different prices including one package based on the Central Electricity Regulatory Commission tariff guidelines.

There is also supply to the Tamil Nadu Electricity Board.
At the end of it all, Lanco would be left with about 800 mw to be sold on merchant basis, the analyst said.

While the merchant sale facility looks decent, the capex on both mine development and the power project worries analysts.
Developing the 15 million tonne per annum mine is expected to cost about Rs3,000 crore, while it would also incur an operating expenditure of about Rs400 per tonne.

“The total cost per tonne including opex, interest and depreciation would be at about Rs900 per tonne. Considering the Rs112 that Lanco has to pay to Mahatamil for each tonne of coal mined, the company’s total outgo would be about Rs1,000 per tonne of coal produced or about Rs1,500 crore per annum,” the source said.
For the entire life of the mine, Lanco would pay about Rs4,200 crore to Mahatamil through the reverse grant formula.

The power project, on the other hand, is expected to cost about Rds10,000 crore. “Whether it is 2,000 mw or 2,500 mw, a significant amount of the generated power has to be supplied to the parties in the deal at prices as per CERC formula. There is not much upside in this. So, the only silver lining is in the form of some residual capacity that can be sold in the open market,” said another industry expert.

Meaning, Lanco would have recover the entire Rs1,500 crore of mining cost per annum by selling 800 mw of power.

“Unless the merchant tariff is at Rs5-5.5 per unit, there is no way Lanco can recover the cost — forget making profits. Interestingly, any increase in coal production means more payments to Mahatamil hence more expectation from merchant tariff,” the source said.

Lanco officials were not available for comments.