Change in valuation method may push thermal coal asset prices lower

Bidders for thermal coal blocks in the auction scheduled for next month are likely to gain if the Centre decides to change the benchmark for calculating the net present value (NPV) of the assets. Seventy-four of the de-allocated coal assets are coming up for auction in December.

While the UPA government used Australian and Indonesian prices as benchmarks to estimate the NPV of metallurgical and thermal coal assets, respectively, according to sources, the Modi government is weighing the option of using Coal India (CIL) prices as the yardstick. The use of Australian and Indonesian prices had raised the upfront payment (by the successful bidder) to ₹35-45 crore, posing an entry barrier, and blocks could not be awarded.

As CIL sells metallurgical coal at close to import parity price, a change in the pricing methodology should not significantly alter the valuation of the few coking coal assets on the block.

But the new methodology could be a windfall for those aiming to bid for thermal coal assets. Though there cannot be a like-to-like comparison due to the difference in moisture content and other aspects, the 4,200 kcal/kg Indonesian coal sells at around $36 a tonne in Indonesia. But its landed cost in India is $50 a tonne. On the contrary, the price of thermal coal of similar calorific value sold by CIL to power stations does not exceed $21 a tonne, post-beneficiation.

So, quite simply, the value of an asset will come down by 40-60 per cent if the NPV is measured based on CIL prices rather than on Indonesian coal rates.

The Centre has about a month to arrive at the formula, before it invites bids for the 74 coal blocks, on December 15.

The NPV has a direct bearing on the floor-rate for submitting bids and the upfront payment (10 per cent of NPV). It would also indirectly influence the bids for such assets.

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