Is Lanco’s bid for MahaTamil viable?

Lanco Infratech changed the rules of the game when it submitted a negative bid in May this year for the development of a coal block in Chhattisgarh, acing rivals who had bid far higher.

In the recently concluded bidding process for the development of the Gare Pelma sector II block, held by MahaTamil Collieries Ltd, which is a joint venture company between Tamil Nadu Electricity Board (TNEB) and Maharashtra State Mining Corporation (MSMC), Lanco said it would pay Rs112 for every tonne mined to the government - instead of charging them, as is the common practice.

There were six final bidders including Lanco. The closest competitive bid to Lanco’s `175 per tonne sought (and not offered to pay like Lanco) was by Sterlite Industries.

GMR Energy bid Rs234 per tonne, Reliance Power charged a price of `380 per tonne, GVK at Rs405 per tonne and L&T Power was way above the scale at Rs819 per tonne.

No wonder Lanco won the contract for the project and was selected as the preferred mine operator.

There are three main points of income or saving which Lanco was looking at when compared with its competitors in the bidding race.
“Lanco is basically planning to earn its profits from the sale of merchant power from the power plant which is likely to have a capacity of close to 2000 mw,” the source said.

He said out of the total power produced, close to 37% will go to Chhattisgarh under a host-state obligation. Of the remaining, half will be sold to MahaTamil and the rest on a merchant basis based on the prevalent merchant tariffs.

Besides this, MahaTamil and its two partners will each have the right of refusal in case they do not wish to buy power. “This additional power can then be diverted for merchant sale too,” he said.

The second point is availability of coal. “Lanco, in its reasoning for the negative bid to MahaTamil has cited that an impending scarcity of thermal coal and reasonably higher merchant rates will be enough for the company to make profits from the plant,” the source said.

The coal mined from the 768 million tonne Gare Pelma sector II coal block will be given by Lanco to TNEB and MSMC based on their stake share in MahaTamil along with a fee of Rs112 per tonne. While MSMC will use the coal for its own purposes, the coal from TNEB will be given back to Lanco to feed the adjoining power plant.

Lanco will have to mine close to 15 million tonne of coal annually from the block.

The third factor, sources said, is that Lanco might also save
in terms of input cost for setting up an additional power plant
as the company’s power subsidiary Lanco Power is already implementing the phase III and phase IV of the 1920 mw power plant in the Pathadi-Saragbundia villages on the Champa-Korba State Highway in Chhattisgarh, which is expected to be operational by 2013-14. The power plant is just over 100 kilometres away from the project site of the coal mine.