Kameswara Rao,Leader Energy, Utilities, and Mining Practice,PwC India
The attractiveness depends on many factors and besides the country and regulatory risks, a potential acquirer needs to consider the reserves and mine geology, the ease and costs of doing business in the country, comfort with its legal and governance systems, access infrastructure, and presence of local suppliers and talent. On these aspects, Australia followed by South Africa, Mozambique and Indonesia offer attractive prospects.
For acquirers seeking coal mines to support their power plants over its life, annual production over a sustained period is a key factor, and in this Australia and South Africa score well ahead of Indonesia. However, this is based on current information, and countries such as Indonesia and Mozambique have significant unexplored areas which may with more exploration bring significant extended supply source.
The domestic market obligation is emerging a significant challenge as the local users start competing for diminishing reserves with exports. Economic growth and higher primary energy costs is causing even the exporting countries to relook at their policies leading to their demand for better terms of trade and reserving outputs for local users.
The domestic obligation policies and its impact differ between jurisdictions. A typical regulation is to mandate supply of a part of production into the domestic market at a fixed price or a discount to the international market price. Another model poses limitation on ownership by foreign nationals and companies. In either case, the resultant effect is that companies build these costs into a higher export contract prices. Who exercises these controls also matters - so, where decentralisation gives more role to local/provincial governments, the uncertainty and cost to companies' increases, pushing up prices. The policy sound well meaning, but in effect are local subsidies and that discourages efficient use of resources besides reducing export incomes.
The success of Chinese state-owned companies in securing major raw materials and energy sources makes a compelling case for a single platform approach in acquisitions. This approach has its merits in reducing transaction costs, cumulating experience, and its better ability to use sovereign negotiating capacity.
In contrast, the Indian experience of individual companies pursuing their own interests has been successful in the private sector, but not in the public sector. Even where the public sector companies have come together to form consortia, the experience has not been satisfactory as the understandable caution of individual line ministries diminishes the agility and willingness to spend. Creating a single platform through a consortium does not work efficiently, and a better approach would be to strengthen the hands of the largest coal company, viz. Coal India to secure overseas assets and supply contracts for the Indian market.
Also, the sustainability and development cost of acquired mines overseas is a very important topic but so far has got very little attention from the acquirers. The process of securing assets has cornered so much attention that capital optimisation and productivity only get a limited view of the management. This will change as consumers' ability to pay reflects back into demand, and as the cost of capital emerges out of the liquidity overhang. Mining is a capital intensive business, and Indian acquirers will need to invest in high quality mine planning and capital productivity improvement initiatives. Further, they must undertake periodic compliance assessment in order to ensure their operations meet local environmental, social, fiscal and regulatory requirements and do not pose a threat to their continued operations and capital invested.
Madhu Sethi,Director,SM Powergen
The easiest country to operate from Indian companies' perspective is Indonesia. It is physically very close and similar to India. Additionally, the pricing of the assets in the country are amongst the lowest and many of the Indian companies are already operating in Indonesia. When it comes to quality of the thermal coal used in the power plants, it is at par with the quality of the Australian or the US coal. Only those companies who are looking at bigger assets are looking at Australia, but then it is a very small portion of companies. In case, your budget is 20 million dollars, then Indonesia offers the most conducive environment.
The Indian domestic market is not being able to supply the required coal to their domestic buyers and the country will soon change from per tonne to calorific value pricing, which will further increase the prices of the domestic coal. The country's infrastructure is completely clogged; it takes an average of seven years for a mine to be operational in India because of the policies. Thus, if you look at the growth curve, the demand for coal in India is growing much faster than the domestic supply. The only way to satisfy this demand is through imported coal.
However, when you look at Indonesia and Australia, their domestic consumptions are much lower than their output and furthermore, their economies are not growing at the rate India is growing. Considering this, it would take many years for both these countries to restrict the exports of their natural resources.
Besides, you have to listen carefully to what Indonesia is saying, they want Indians to build power plants and export electricity. The Indian companies might be opening thermal power plants and in the process, would offer other value addition services to Indonesia and that is what Indonesia is suggesting. The companies might have to change their strategies to suit the prevailing conditions of the host country. I don't see this as a major issue for the next five years.
The best strategy for Indian companies right now would be to go to much harsher places like Mongolia and Mozambique, where the cost of entry plus the difficulty of entering is much higher, once they have invested in Indonesia and Australia. In the long run, these are the countries which would prove to be more cost effective, given the ever increasing coal prices. Right now, the coal prices are already over $100 per tonne which would further go up to $200 per tonne in the next three to four years.
A few years ago, this country had major government-owned entities like one airline company, one car company, one steel company and there was no innovativeness. Now, the government had opened up all these sectors but some people in the industry want this `one-company' concept all over again. We have one company in the form of International Coal Ventures Limited (ICVL) but I don't think that ICVL has bought any mines whereas private enterprises have acquired many mines all over the world. The problem is what the government does happens very slowly!
Also, in my opinion it is a misnomer that the Chinese government is acquiring mines abroad. It's being done by private Chinese companies but the only difference is between the Chinese and the Indian entrepreneur. Chinese entrepreneurs take more risk while Indian entrepreneurs are more risk averse, which is the reason why the Chinese entrepreneurs go to Africa and do something that the Indians will think twice before doing! Thus, the deals we are losing have nothing to do with the government but more so with the mindset of the Indian companies. For most of the Indian private companies, their mine acquisition time table runs into months and sometimes, into even years. It's a sellers' market and the seller is not going to think if it's the Indian money or the Chinese money, they just think on how to maximise the deal.
You have to do your due diligence before acquiring a new mine. If you identify a mine, you should have a team which is willing to fly and do the due diligence and you should be willing to spend the money. The companies should keep in mind that they are going after a natural resource created a billion of years ago which means that if you don't have the right personnel in place working at the right speed then it is going to get very difficult for you to find anything. There are some Indian companies which are willing to take risk and are moving fast and these are the companies whose names come up every day in the newspapers.
Rajendra Kumar Tiwari ,Senior Deputy General Manager-Coal Mines,Jindal Power Limited
When it comes to Indian power developers scouting for mines abroad, there are three countries which top the list, Australia, Indonesia and South Africa. Australian coal is of a good quality and has high calorific value but when it comes to freight charges, which are around 70-80 dollars per tonne, it is much more than the other countries.
Indonesia offers cheaper freight charges, but the coal has 40-45 percent more moisture.
Also, companies face massive problems in determining the true owner of the mines in Indonesia and they can't be too careful before signing the documents. Australia has a far more open mine acquisition policy than Indonesia and these ad hoc things are not there.
Therefore, it depends entirely on the requirements of the Indian companies as each of these countries has its specific problems and unique advantages.
Indian companies have enough expertise in mining, which helps in ensuring the sustainability of the mines. Instead of employing people from the respective countries, we should send Indian experts to manage the mines abroad.