• JUNE 3, 2010

Power companies: Rushing for black gold

First it was Tata Power, and now it is NTPC. Companies in the Indian power sector are joining the rush to buy global commodity assets. It is coal, also known as 'black gold', for these companies. Tata Power had announced a couple of days back its plans of buying more coal assets in Indonesia and South Africa. Now, NTPC has already gone ahead and made an acquisition. The company is set to buy controlling stake in a coal field in Australia. The deal is said to be valued at US$ 1-1.5 bn.

These plans and actions talk a lot about the urgency with which Indian power companies are eyeing coal assets abroad. While some of these companies have also won tenders for mining coal in India, execution here is pretty slow. And the lure of buying an operational coal mine is any day brighter.

As per Tata Power's management, the company's coal imports are expected to surge to 22 m tonnes per annum (MTPA) by 2014. These stand at 5 MTPA currently. The company already owns a 30% stake in coal mines owned by Bumi Resources. Most of the coal supplies for the company's upcoming projects will come from these mines. Anyways, it is also looking for mines in Australia, South Africa and South-East Asia to ensure fuel security for future projects.

We see these international coal assets as having big importance for companies like Tata Power and NTPC. Not only is this considering these companies' expansion plans. But it also stems from the shortfall in coal supplies they are facing from domestic coal suppliers like Coal India Ltd.

Anyways, buying global mining assets has its risks as well. Improper calculation of reserves is one. As buyers have seen in the past, actual reserves have turned out to be a fraction of the stated or promised deposits. This also casts doubts on the valuations paid for such assets.

Another major risk is that of international regulations. Mines are government properties and buyers pay royalty on mining the commodities. Any adverse regulation can completely change the dynamics that were present at the time of buying the assets.

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