Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Fancy a truckload of the world's biggest coal miner?

New Delhi is planning to sell a 10 percent stake in Coal India Ltd., the Economic Times reported Monday, without saying where it got the information. Such a deal could be worth about 197 billion rupees ($2.9 billion) at current market prices, and would reduce the government's share in the company to about 70 percent.

Investors minded to buy into coal in spite of its contribution to climate change and the fact that global demand is probably in terminal decline could do worse than have a look. Coal India dug up about one ton out of every 14 mined worldwide during 2015, making it far and away the biggest producer in volume terms . It's also in the almost unique position among large coal miners of making profits in excess of its cost of capital.

In the Black
Coal India is the only large coal miner whose return on capital is above its cost of capital
Source: Bloomberg
Note: Axis has been limited to -3 for clarity. Peabody Energy's ROIC/WACC ratio is minus 14.4. Only miners with at least $2 billion in annual revenues have been included. Shows return on invested capital divided by weighted average cost of capital. Only numbers higher than one represent economic profits.

Not only that: Thanks to its position as a government-controlled corner of India's regulated electricity market, the company been consistently profitable, posting positive results in every one of the past 24 quarters for which Bloomberg has data.

Money in Dirt
Coal India has posted net income in every quarter since the start of 2011
Source: Bloomberg
Note: Figures for March and June 2017 are estimates.

So what's not to like?

For starters, there's the issue of competition. Coal is traditionally a near-monopoly in India, with Coal India meeting about four-fifths of demand while state-owned Singareni Collieries Co. and various importers make up the balance. Other companies are permitted to mine product for use only in their own power and industrial plants, and forbidden from selling to third parties.

That's set to change. The government will auction four mines in the year starting April 1 that will be permitted to sell coal on the open market, federal coal secretary Susheel Kumar told reporters in New Delhi earlier this month.

This may prove to be only a toe in the water of deregulation -- but a more open market for coal could cause serious problems for incumbents, given their extremely low productivity. The average employee at Coal India produces about 1,811 metric tons of coal a year, less than a quarter of the 8,388 tons at Indonesian pits and well below the 30,746 tons at major U.S. coal miners, according to Michelle Leung, an analyst with Bloomberg Intelligence.

There's another problem. Coal is still fundamental to India's energy mix, but it's under growing threat from the plummeting cost of renewables.

Heat and Dust
The price of solar generation at Indian utility auctions has fallen dramatically over the past four years
Source: NTPC; Bloomberg New Energy Finance; LiveMint.com; Gadfly calculations.
Note: 2017 figure based on levelized cost from single reported auction in Rewa, Madhya Pradesh.

At NTPC Ltd., the country's biggest generator, coal-powered electricity traditionally costs about three rupees a kilowatt hour. That was enough to make it clearly cheaper than solar a few years ago -- but the cost of finance, panels and installation has since slumped dramatically.

The winning bid in a power auction in Madhya Pradesh state last week came in at 2.97 rupees/kWh for the first year, giving an average cost of 3.30 rupees/kWh over the life of the contract, according to Livemint.com. That's a third less than a November 2015 auction won by since-bankrupted U.S. solar developer SunEdison Inc., which at the time was heralded as unfeasibly cheap. A host of comparable results over the past year suggest that such prices are no longer unviable outliers. The Madhya Pradesh result was welcomed by Piyush Goyal, the country's energy and mining minister:

Still, at least Coal India is cheap, right? Well, not so much.

While the shares fell 14 percent in 2015 and 9 percent last year and are now priced below the 343 rupees at which they ended their first day of trade in 2010, in terms of valuation they've rarely been more costly -- touching 14.6 times blended forward 12-month Ebitda this month, compared with 11.8 times Ebitda at Rio Tinto Group, owner of mining's best balance sheet.

Costly Fuel
Coal India's blended forward 12-month price-earnings ratio has rarely been richer than it is now
Source: Bloomberg

Such a valuation might be justified if Coal India were heading into a booming market, but it certainly doesn't look that way. Here's how the Economic Times article, sourced to an unnamed "senior Coal India executive," describes its near-term prospects:

The company has been witnessing a fall in production as well as sales due to less than anticipated power demand growth. Against a near 10 per cent growth in 2015-16, this year the company has not been able to attain a growth of even 2 per cent either in sales or production.

The timing of the divestment will be crucial because the company has not been able to fulfill its targets. Revenues and profits are likely to be less than anticipated as price realisation from e-auction has been falling due to reduced demand.

Way to go selling the deal! 

Like any other shareholder, New Delhi keeps an eye on market sentiment, so it's no surprise that it's seeking to offload a stake at a time when valuations are looking rich. Investors might want to consider though: If the government is so keen to sell, why should you be so keen to buy?

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. China Shenhua Energy Co.'s revenues are larger, though its volumes of 281 million metric tons during the 12 months through December 2015 aren't much more than half as big as Coal India's 539 million tons in the year ended March 2016.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net