Mergers_&_Acquisitions_Identifying_Potential_Target_Companies_in_the_Indian_Coal_Industry_M by Sutherland Global Services

Case Study and Sample Slides India: Coal Industry Assessment

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Indian Coal Industry Assessment Client • The client is a leading private equity firm seeking to identify investment opportunities in the coal-mining value chain in India

Client Ask • The client engaged SGS to map the value chain, size the market in each step of the value chain and identify potential targets • In detail, the client required SGS to provide an overview of coal mining activity in India, covering aspects such as coal’s relevance, consumption, reserves, production, major players, pricing mechanism, future prospects, industry profitability, etc. Further, the client needed to understand the business dynamics of each segment – size, growth, competitive intensity, etc. • Further, SGS was asked to map out the entire industry value chain by identifying each associated business activity of coal mining • Finally, SGS needed to make a comprehensive list of players in each segment & get information pertaining to revenues, margins, etc.

Sutherland’s Solution • SGS conducted an in-depth secondary research to establish the mining value chain and business dynamics of each segment in India. Further, it evaluated competitive landscape within each segment in the value chain. Interviews were conducted across segments to arrive at the market size, competition and growth prospects in the respective segments • Findings from the study were collated, analyzed and presented to the client. Additionally, a deal sourcing Excel was prepared, which identified over 445 players associated with various aspects of the coal business in India

•Benefits to the Client • SGS research provided detailed insights into the industry, which helped establish the relative attractiveness of each segment vis-à-vis the other. It was inferred from the study that while the Coal Mining Equipment – HEMM Equipment (Opencast Mining) provides INR126 billion opportunity in the next 4-5 years, underground coal mining equipment market provides INR16 Billion opportunity in the next 3-4 years • Primary research conducted by SGS helped in establishing lesser-known business segments such as mechanical transmission products associated with open-cast mining

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India accounts for 13% of global coal reserves but only 8% of global production Global Proved Reserves

Global Production

• India has the fourth largest proven coal reserves and is the third largest producer of coal in the world. However, the country lags in production share, primarily due to poor coal quality, low productivity, review of reserves, logistics challenges and problems, regulatory barriers, and resettlement problems • While there is a general slackening in global proven reserves growth, India’s proven reserves have been steadily increasing

Source: Sutherland Research

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Reserve estimates uncertain as reserve areas remain unexplored India’s Coal Reserves (Bn Tonne)

Observations

300

250

264.5

267.2

253.3

257.4

117.1

119.8

120.2

124.2

123.5

95.9

99.1

105.8

101.8

91.6

37.9

37.8

37.7

38.1

38.5

37.9

2004

2005

2006

2007

2008

2009

245.7

247.8

116.2

200

150

100

• Significant coal reserves but estimates remain uncertain – Reserves classification system does not take into account quality, mineability and extractability – Reserves are tentatively estimated based on CMPDIL’s assumption of parameters rather than actual testing of the same • Vastly unexplored – There is an estimated 22,400 square km of coal-bearing area in the country, of which only 45% has been systematically explored by the GSI (Geological Survey of India) • As of December 2009, coal reserves stood at 267.2 bn tonnes, of which only 39% were proven

Proved Inferred

Indicated Total

Source: Sutherland Research

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Coal reserves are concentrated in the eastern part of the country Coal Reserves Distribution in India

States

Arunachal Pradesh Meghalaya Uttar Pradesh

Madhya Pradesh Maharashtra

Jharkhand

Assam

Orissa West Bengal

Andhra Pradesh

Jharkhand

39,480

Orissa

19,944

West Bengal

11,653

Chhattisgarh

10,910

Andhra Pradesh

9,194

Madhya Pradesh

8,041

Maharashtra

5,255

Uttar Pradesh

866

Assam

348

Meghalaya

Arunachal Pradesh

Nagaland

Total Chhattisgarh

•

Reserves more than 10,000 MT Reserves more than 5,000 MT Reserves more than 100 MT Reserves less than 100 MT Source: Ministry of Coal (Government of India), Coal India Ltd. (CIL)

Proved Reserves (MT) (2008-09)

•

105,820

Coal is present in 14 out of 28 states in India. Jharkhand accounts for about 37% of the total proven reserves of the country, followed by Orissa (19%), West Bengal (11%) and Chhattisgarh (10.2%) Eastern region of the country has major coal deposits, with the four major states, i.e. Jharkhand, Chhattisgarh, Orissa and West Bengal accounting for about 77.5% of India’s total coal reserves

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Reserves are low in calorific value and of sub-standard quality Proven Reserves

Non-Coking Coal

Ash + Moisture (%)

Coking Coal

55.0%

GRADE E,F,G – 53.9 Bn Tonnes

34.0%

GRADE D – 12.5 Bn Tonnes

28.6%

GRADE C – 9.6 Bn Tonnes

23.8%

GRADE B – 4.3 Bn Tonnes

19.6% GRADE A– 1.2 Bn Calorific Value (Kcal / Kg)

• Quality of coal is inferior – Only about 15-20% of reserves are of high quality (A, B and Prime coking), while the rest are relatively sub-standard • Majority of deposits are of the non-coking type that find application in power production. Reserves of coking coal meant for metallurgical purposes are limited and India has to import coking coal to meet the requirements of the domestic iron and steel industry Source: Ministry of Coal, CIL Presentation

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Most reserves are controlled and explored by state-owned companies (Coal India & SCCL) Proven Reserves in Billion Tonnes

~ 470

~ 210

~ 55

Mines / Blocks

• Coal mining was nationalized in 1971, largely to improve then existing dissatisfactory mining conditions, e.g. slaughter mining, violation of mine safety laws, industrial unrest, failure to make investments in mine development, reluctance to mechanize, etc. and to meet India’s long-term coal requirements • Coal India Limited and Singareni Collieries (SCCL) were entrusted with the task of exploration and development of coal resources in the country and hence came to own the reserves that existed • In 1993, the act was amended to allow coal mining for captive consumption by the power and iron and steel sector. Subsequently, cement was added to the list. Since 1993, ~210 coal blocks have been awarded to private parties for development • Yet Coal India and SCCL continue to dominate and control the largest tracts of coal reserves and are the primary channels of regulating supply and prices of coal in the country

Source: CIL, SCCL Presentation

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Consistent production growth at CIL and SCCL has mildly accelerated production in the past two years Coal Production

Observations CAGR (Mn Tonnes)

493 457 407 328

341

361

431

383

6.01% 20.47% 0.81% 5.39% 5.38%

• Coal production has been consistent in India, with major contribution coming from CIL • Non-coking coal dominates coal production in India and is mainly used for power generation and industrial uses • CIL is the major coal producer in the country and accounts for approximately 82% of annual supply • Captive production has not taken off in a significant way, owing to delays in regulatory clearances. Only about 20 of the auctioned ~200 blocks are currently under production

Source: Ministry of Coal (Government of India), Coal India Ltd. (CIL)

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Depleting existing mines to compel CIL & SCCL to invest in ‘New’ projects to meet production targets Segmentation of Annual Production Target (MT) CIL

Observations CAGR

End of X Plan

7.5%

End of XI Plan

4.7%

• In contrast to the 11th Plan period, bulk of the targeted incremental production of ~150m tonnes during the 12th Plan period is proposed to be met through commissioning of new mines • CIL’s mines are mature, and hence in a depletion cycle stage wherein production declines steadily

End of XII Plan

Segmentation of Annual Production Target (MT) SCCL CAGR End of X Plan

2.1%

• Commissioning of new mines is likely to bolster the demand for equipment and contracting services

End of XI Plan

1.9% End of XII Plan

Source: Annual Report - Ministry of Coal, Coal India Limited (CIL), SCCL, IDFC-SSKI Coal Report

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Fast awarding coal blocks to private players – Most captive blocks await environment and other clearances to begin production Blocks 209

Total 209 Blocks

• Mining was opened to the private sector post an amendment to the Coal Nationalization Act in 1993

2009 2008 2007

• Approximately 210 blocks were identified from SCCL & CIL’s inventory, for allocation to private players, for captive consumption

2006

2005 2004 1993-03

Total Reserves 48.4%

Observations

Total 48.4 BT Reserves

2009 2008

2007

2006

• Government has awarded 209 blocks till date • The majority of the reserves have been awarded to the power sector • However, only 20 blocks out of the total ~200 awarded, are currently operational

2005 2004 1993-03 Source: Ministry of Coal

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India’s coal demand, largely driven by power, has always outstripped supply India - Coal Demand & Supply (Million Tonnes) 555 MT (2008-09)

Observations • Demand for coal has grown rapidly (CAGR of 7.2% over 2003-09) and has outpaced supply (CAGR of 6.3%) during the same period • As a result, coal deficit – with a CAGR of 16.6% over 2003-09 – prompted heavy imports from other coalproducing nations • Power utilities, steel and cement are the key coalconsuming sectors in India. Apart from direct demand from utilities (67% share in coal consumption), captive power generation by steel and other metal industries also generate demand for coal • Growth in economy and subsequent demand for power generation regulates coal demand • Coal demand is likely to sustain as it remains a preferred source of energy, specially for power generation • Also, sectors supporting India’s growing infrastructure (steel and cement) requirements are expected to boost demand for coal

Source: Annual Report-Ministry of Coal, Working Group Report on Coal & Lignite

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We mapped a total of 445 companies operating in the coal mining value chain in India Category

Subcategory

Number of Companies

Mining Equipment

Drilling Equipment

Coal Handling Equipment

Coal Exploration

Coal Explorations Services

Coal Mining

Coal Mining Services (including captives)

Coal Transportation

Coal Transportation Services

Coal Trading

Coal Trading Services

Coal Washing

Coal Washeries

EPC

Mine Planning & Construction (including lab testing) Washery Plants Integrators

Contract Mining – Integrated Services (OB, Mining & Haulage)

Contract Mining – Overburden Removal (OB Only)

Coal Mining Equipment

Mining Contractor