Lanco says coal from Griffin to be 40% cheaper

Lanco Infratech is hoping to make significant savings in its raw material costs by sourcing coal at a cheaper price for its proposed power generational facilities following the acquisition of Griffin coal mines in western Australia.

“We estimate that the coal from the Griffin mines would be available to us Australian $80-85 per tonne on c.i.f, or 40% cheaper than the current market price of $115-120,” Suresh Kumar, Lanco’s chief financial officer, said during an analyst call on Wednesday.

Lanco last week signed an agreement with Griffin to acquire its coal mines in western Australia.

The mining operations have been in trouble for some time due to various administrative issues and the inability of the management to inject more funds for improving the operational abilities of the mines.

Lanco has been working on a strategy to set up about 15,000 mw generation capacity by 2015 and the company would depend on domestic mines for 70% of the coal requirement. The balance would be imported from various sources.

“The imports would be about 20 million tonne at 4,700-4,800 Kcal. The operating assets of Griffin are producing about 4.5-5 million tonne. We will be able to ramp it up to 6 million tonnes immediately. The resources in the mines are estimated at about 1.1 billion tonne,” he said.

Lanco would pay for Griffin mines in two parts - upfront cost and deferred milestone payments in two installments. Though not willing to provide a break up of the total payment, Kumar said that the total deal value would be about $750 million.

The company is planning to ramp up the capacities by 2014.

Of the 4.5 million tonne that are being produced from the mines currently, about 3 million tonne are being sold in the Australian market including 2 million tonne to a power plant wholly owned by Griffin.

Another 1 million tonne are being supplied to other Australian companies including a few cement companies.

In addition to the cost Lanco would be paying for acquiring the mines, it would also incur a capital expenditure of about $900 million on improving the infrastructure around the mines for better supply logistics.

The investments would go into improving the port and rail
networks for transporting coal from the mines to various destinations.

“We are looking at keeping the costs down in the operation of the mines by opting for contract miners. The mining company currently has 450 employees and this human resource is immediately available to us. There were some issues with the union there earlier. However, those issues were primarily due to the inability in keeping the operations going by the current management.

Interestingly, Kumar said, there is a significant area around the current mining area that has not been explored for assessing the resources.

There were about 16 suitors for the Griffin mines and another
infrastructure major GVK too was in keen contest for acquiring the asset.
The all-cash deal would be funded by Lanco through a combination of internal accruals and debt. For the immediate term, Lanco is seeking a bridge loan from ICICI Bank for funding the deal.

“Our balance sheet is well positioned to support the deal. We will be able to close the deal in the next two to three months. We expect tightness in the coal market beyond 2015. There is going to be a balance between supply and demand and there would be no extra supply. The tightness would be reflected in the pricing too. The Griffin acquisition will secure our fuel supplies,” he explained.