Hindalco's Mahan project faces risk of cost spike

Hindalco Industries, the Aditya Birla Group flagship, faces a surge in production cost at its upcoming aluminium project in Mahan, Madhya Pradesh.

The company is building a 359 kilo tonne per annum (ktpa) aluminium smelter and a 750 megawatt (mw) plant as a captive source, slated to be operational by this year end.

The power plant will draw coal from the Mahan coal block located in the Singrauli fields.

While the company said work is on schedule, an impediment to the project’s low-cost operation could be the coal block, which ran into a green hurdle in the form of a ‘no-go’ area last year.

Debnarayan Bhattacharya, managing director of Hindalco, said the issue has been referred to the group of ministers (GoM) by the ministry of environment and forests and a decision is expected soon.

But analysts are jittery just in case the GoM declines approval.

“It is not economical to produce aluminium without a captive source. Once the block is cleared, Hindalco can see a huge cost reduction as feedstock will be at virtually e-auction rates,”said an analyst with an international brokerage, requesting anonymity.

During his interaction with DNA Money a few days back, the analyst had said considering alumina and power comprise close to 70% of the production cost of aluminium, captive source is a must for Hindalco.

The company is planning to raise its aluminium smelting capacity to 917 ktpa by the next fiscal and 1.28 mtpa by fiscal 2014.
The coal block is currently held by Mahan Coal Ltd, a joint venture company equally held by Essar Power and Hindalco Industries.    

While Essar has an offtake agreement for 60% or 5.4 million tonnes per annum (mtpa) of coal from the block to feed its upcoming 1000 mw plant in the state, Hindalco will take the remaining to fuel its 750 mw power plant.

Hindalco has an offtake agreement of 3.6 million tonnes per annum of coal from the coal block.

Analysts Pinakin Parikh and Neha Manpuria of JP Morgan said the company has admitted to a difficult situation.

“Given the changes that may be involved in the approval and coal sourcing pattern, the scope and cost of the project may undergo some modifications,” they said, in a note on August 12.

“This, in our view, indicates that while Mahan is on track, cost of production is likely to be sharply higher on coal issues,” Parikh and Manpuria said.

Mahan Coal on its website said the mine will cater to the combined Rs6,400 crore power projects being set up by the two conglomerates.