Risks to Coal India and India’s Coal Strategy: No Plan B

Tom Sanzillo, Director of Finance

Institute for Energy Economics and Financial Analysis

New York Society of Security AnalystsNovember 13, 2013

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Overview

• India’s Coal Plan: Coal India Limited’s (CIL)

Role

•Risks to CIL’s Stock Performance

•Risks to India’s Coal Plan

•A cumulative risk scenario

India’s coal plan

India’s Coal Plan

•70% of generation currently from coal

•56% capacity from coal

•Total coal generation estimated to be

flat by 2017, drop to 58% by 2030

•Rapidly rising GDP and electricity

demand requires new coal capacity

Expand Coal capacity by 69,000 MW

• Assumes rising private sector activity

• 79% of new capacity from coal

State of India increase

domestic coal production

• Increase from 540 million tons per annum (mtpa) to 795 mtpa by 201

• In 11th Year plan India originally estimated 731 by 2012; reduced target to 640 mtpa

Increase Coal Imports from 130

mtpa 2013 to 185-190 mtpa by 2017

• Goldman estimates total imports in Pacific region up 45 mtpa

• India up 60 mtpa offsetting China’s decline by 60 mtpa

Five Year Plan through 2017: Increased plans for coal sector

“With the best effort at increasing domestic production it will not be

possible to meet the increased demand for coal from domestic production”

(12th Five Year Plan).

• CIL from 435 Million Tons Per Annum to 615 Million Tons Per Annum by 2017 (8% growth estimate, 4.6% achieved during 11th Year Plan)

• Aggressive foreign acquisitions.

Coal India Limited (CIL)’s Role

Coal India: risks to stock price

Risk #1: Weak Stock Performance since 2010, continues

• $5.51 per share in 2010to $4.54 per share in 2013 – or an approximate 18% drop

• Rose 40% on initial trading to $7.80 per share

• Peaked at $9.00 per share in May 2011

• Down 21% - October 2013 YOY

New sale of stock seeking $1.3 billion

Strong start, weak prices 245INR (IPO) to 279INR per share (10/26)

Risk # 2: CIL Shrinking Margins

Revenue $ Per Ton Cost $ Per Ton Margins$0

$5

$10

$15

$20

$25

$30

2011 2012 2013 est 2014 est

Risk # 3: Dysfunctional Pricing

• India Historic Domestic Price: $30 +/- per ton

• India energy adjusted: $26 per ton

• CIL - $19-$24 per ton (2011 –present)

• Historic Import Price: $70+/- per ton

• China energy adjusted: $70 per ton

“Coal prices are theoretically decontrolled, but in fact they are adjusted only in

consultation with the Ministry” (Twelfth Five Year Plan, Energy)

Risk #4: More Imports – Upward Pressure on Coal and Electricity Prices

•The Children’s Investment Fund (TCI), shareholder, institutes suit

•CIL selling coal below fair market value prices• Uneven economic distribution of subsidy

•CIF: A market price is $75-$80 per ton ($50 per ton higher than current CIL pricing)

•Governance concern•CIF sold >25% of shares purchased in 2010

Risk #5: Shareholder Concerns

Risk # 6: State of India Concerns

“Given the importance of expanding supply and the indifferent

performance of Coal India in increasing production, there is need

for inducting private sector investment in coal”

(Twelfth Five Year Plan, Energy, p. 37)

Risk # 7: Is CIL ready for global prime time

•Criminal Indictments•Coal Reserves Reporting•Overstaffed

•CIL has 350,000 employees and produces 400+ mtpa – investor concern.

RiskS to India’sCoal Plan

Risk #1: Slower Economic Growth

•Slowing worldwide GDP growth, more cautious outlooks— 2013 and beyond

•11th year plan assumed 9% GDP annual growth•Achieved: 8.2% GDP annual growth and electricity growth of 6.4%

•12th year plan assumes GDP annual growth 9.0% minimum•Electricity sector – 8.5% growth

•Current GDP growth for 2013 expected at 4-5%•Several down grades during year•Generation growth at 5.7% in 2013, coal generation up by 4% YOY (Through Sept. 2013)

Risk # 2: Currency and Fiscal Short/Long Term Pressure on Energy Sector

• Fossil fuel subsidies, including coal, trigger deficit spending, diminish value of Rupee

• Since 2010, IPO Rupee drops 40%

• Utilities/Government pay for coal in $US and pay for electricity system in Rupees

• Risks• Short term deficits• Medium term recovery - slow• Long term – fossil fuel subsidies/economic growth, sustainable

Risk # 3: Upward Coal and Electricity Prices Needed: Unpopular/Dis-economic?

“Electricity to the consumer is also underpriced.”

“A transition to more rational energy pricing requires upward adjustment in all these prices.”

“Electricity prices are set by State regulators but most regulators have shown a tendency to hold back tariff adjustments, typically under political pressure.”

“Suppressing energy prices will not help.” (Twelfth Five Year Plan, Electricity Prices)

Risk # 4: Slowdown in Coal Plant Expansions

Massive insolvency of state utilities weakens investment climate• Annual losses growing at discoms. Current situation “unviable”

Small Developers backing out of new plants• Prices do not incentivize new power, coal shortages• Large developers: full hands, empty pockets• State of India BBB- ( Fitch/SP negative watch)

World Bank and other IFI’s • Policy to diminish support for coal fired generation• Support for renewable investment

The negative case of China• Air pollution• Can India afford debt of Chinese style coal build out?

Risk # 5: Supply Expansion International Acquisitions

• CIL’s Mozambique effort

• Owns coal blocks

• Fielding proposals from other African countries

• Private efforts to deliver new reserves from Australia

and United States challenged.

• Australia – in discussion on proposals

• United States – CIL reviewing proposals

CUMULATIVE risks

Cumulative Risk: Will Coal India and coal strategy be a drag on India’s growth plans?

Coal India• Failure to raise share value• Supply problems – performance and reserves• Shrinking Margins – political revenues and rising costs of mining

• Dysfunctional Coal Prices – too low, exports exacerbate economics

• Governance: shareholder concerns• Low Confidence in Coal India

Cumulative Risk: Will Coal India and coal strategy be a drag on India’s growth plans?

India Coal Strategy• Slower Economic Growth

• Impacts on industrial and residential differently• Supply Problems• Currency and Fiscal Pressures• Power Price Dilemma – do rising prices harm a slowing

economy?• Acquisition Risks• Slowdown in Coal Plant Expansion – cash strapped

utilities – pull back from coal