India will use the price of imported coal to value mines in next year’s inaugural auctions, after criticism it lost $34 billion in revenue giving away the assets, said three people with knowledge of the plan.
The floor price for nine mines that will probably be sold before March 31 will be calculated using a discounted cash-flow valuation based on a 15 percent discount to the freight-on-board price indexes from Argus-McCloskey and Platts, said the people, who asked not to be named because the matter is confidential.
Putting a price on the mines may increase the cost of the projects, while providing some defense to Prime Minister Manmohan Singh whose government has been under attack for either giving away or under-pricing resources. A Comptroller and Auditor General of India’s report in August blamed the government for delaying auctions, which led to revenue losses.
The coal ministry is now seeking agreement from the states where coal mines are located, before Coal India Ltd.’s unit Central Mine Planning & Design Institute starts work on finalizing the valuations, the people said.
India began allocating coal mines to companies for their own use in 1993 and gave away 194 blocks with reserves of 44.4 billion tons. Of these, only 30 have started production, according to the auditor’s report.
The nation implemented an auction policy to allocate coal mines in 2010. The coal ministry subsequently prepared a list of 54 coal blocks with reserves of 19 billion tons for captive allocation, which will be allotted in phases.
Discounted cash flow valuations use the expected cash income over the life of the mine adjusted against expenses, such as capital expenditure, energy and wage costs and interest payments.