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A critical analysis of equity investments in foreign coal mining companies by GOSL

06 Nov 2013 - {{hitsCtrl.values.hits}}

Two recent articles in a weekly newspaper reported that the government of Sri Lanka has been advised equity participation in coal mining companies after the Board of Investment (BOI) had contacted 20 potential coal producing companies in Indonesia , China and particularly in Australia and include three companies Orpheus Energy Ltd. Australia, Shanxi Coking Coal Group China and Yancoal Australia all of whom have agreed to supply coal on a long-term basis, and trial shipments of 20, 000 to 80 ,000 tons are available at current prices. It is not clear whether this is a commitment prior signing long-term contracts and from which company /ies trial purchases will be made.

Before I deal with the three companies above, I shall review the demand of coal. The use of coal continues to grow rapidly and will continue together with other fuels, to support world economic and social development particularly in rapidly developing world economies such as China and India.

The consumption of coal in China increased from 1.5 billion tons in 2000 to 3.8 billion tons by 2011, almost a threefold increase and the electricity production from coal in 2009 was 79 percent.

India consumed 122.9 million tons in 1980 and 721.4 million tons in 2011 a six fold increase and electricity production from coal was 66 per cent with an additional 3 per cent from lignite in 2009.

At present China consumes nearly as much coal as the rest of the world combined and the growth of world consumption increased from 3billion tons in 1970 to 6.9 billion tons in 2011.

However the IEA’s Energy Technology Perspectives 2010 target reduction in non renewable energy related (coal, oil and gas, shale gas) CO2   emissions by 50 per cent and such emissions from power generation are projected to be reduced by 76 per cent. Renewable energy (wind, solar and hydro) will account for 48 per cent of power generation and nuclear 24 percent.

It must be stressed that expansion of electricity generation by commissioning coal power plants will increase   emissions of CO2 resulting in global warming and eventually climate change. The construction of coal power plants from 2010 to 2035 should aim at a path to achieve near –zero emissions by retrofitting the coal plants with Carbon Capture Storage (CCS)   in 2015 and   commercial Integrated   Gasification Combined Cycle (IGCC) by 2020 and finally Retrofit Pulverized Coal Plants with CCS by 2035.Accordingly the cost of construction of coal power plants will increase dramatically if we are to reduce CO2 emissions.

According to International Energy Agency (IEA) the deployment of some technologies to use renewable energy such as   wind, solar, wave etc for generation of electricity will increase carbon price   to US$ 175 /ton of CO2.

Since substantial natural and financial resources are needed to   develop alternative sources of electricity at a scale to replace coal, it is stressed the importance of CCS in mitigating CO2 reductions and thus global warming.

Sri Lanka’s projected electricity generation mainly from thermal and hydro   was 960 GWh in the year 2000 and was 96 percent and 4 percent respectively. In 2011 it was 4968 GWh where thermal contributed to 86 per cent , hydro 12 percent and others (solar, wind ) 2 per cent .The installed capacity of power generation mix was 186 MW at 94 percent thermal and 6 percent hydro in 2000 which increased to 1081 GWh in 2011 (an increase of nearly 6 times within 10 years) with a mix of 78 percent thermal, 18 percent hydro and 4 percent others. It is also reported that the private sector contributed to 43 percent of the power demand at the end of 2011. (Source RAM Ratings (Lanka) Ltd.-Sri Lanka’s Power Sector –Firing the Rain August 2012).

Reduction on thermal energy reliance
The latest report published by the ADB indicated that Sri Lanka needs to reduce its reliance on thermal energy. “It may not be wise to rely on thermal energy due to environmental concerns and status of future world markets”. Energy outlook for Asia and the Pacific notes that Sri Lanka’s electricity demand is projected to grow by 3.6 per cent a year. The ADB recommends that “Sri Lanka must utilize hydro energy for power generation while increasing the role of renewable energy in the country’s power generation mix.”

BOI Report on Three Coal Mining Companies for Equity Investment
In the backdrop of the above analyses, my comments on the above are as follows:

Orpheus Energy Ltd

Orpheus Energy Ltd. (OEG ASX) is a junior coal producer engaged in acquiring exploring and developing projects in Indonesia and Australia. In March 2012 the company secured 50 per cent interest in the JV partner PT Mega Colt’s ADK operating coal mine located in South Kalimantan, Indonesia. The revenue was 4.32 M AUS$ and with a net income of - 4.12 M Aus $ incorporated in 2006 with 394 employees. This revenue could be compared to Tiaro Coal of 189 M AUS$ and market capitalization of Orpheus is only 9 million AUS $ as compared to other coal mining companies going up to AUS $ 1,662 million. (Financial Times as of 2013)

Shanxi Coking Coal Group

Shanxi is the largest coking coal producer in China with a wide variety of products and 28 mines and 18 coal –washing plants and a production capacity of 65.8 million tons . The company trades with South Korea, India and Taiwan in coal and sells large excavation equipment to Romania, the Philippines, Russian Federation , Nigeria , Pakistan, Malaysia and Thailand.

Yancoal Australia

Yancoal was incorporated in Australia in November 2004 as a wholly owned subsidiary of Yanzhou Coal Mining Company Ltd(Yanzhou) in China and is publicly listed in Shanghai, Hong Kong and New York stock exchanges. Yancoal was formed with the intention of   acquiring and further developing Australian coal assets and to introduce underground mining technology Long Top Coal Caving (LTCC) .

Yancoal manages on behalf of Yangtze applying   LTCC and Ultra Clean Coal (UCC) technologies and other exploration assets and operates seven mines located in New South Wales and Queensland.

Conclusions
According to media reports, the BOI has indicated that the total annual coal demand mainly for generating electricity in Sri Lanka is 3.75 million metric tons by 2017 and the Norochcholaii Plant presently consume about 600,000 -700,000 metric tons and the proposed Trincomalee   Sampur Plant projected to 1.5 million metric tons per year.

With the uncertainty of the projected utilization of coal for electricity generation in the short , medium and long-term as analyzed above and the profiles of the three identified foreign companies involved in a diversified mix of mining , exploration and due diligence review of projects and suppliers of machinery, it would not be advisable for the GOSL to take equity in these companies for long term supply of coal. Further with the market   showing downward trends it is possible that long term contracts negotiated at present prices, GOSL will be at grave risk as international trading practice is to enter into “take or pay “contracts. Moreover if 15 per cent equity envisaged by GOSL as recommended by BOI, it will be a disaster as mining costs and other technologies will lead to additional capital costs, overheads and production costs..

It must be stressed that investments in coal mining in Australia are mainly by Chinese companies with a majority shareholding and sometimes wholly owned by China and   Yancoal a Chinese company is an example.. Also the off shore companies’ especially in Indonesia will not guarantee security on investment by third parties.
Further most of the coal output will be channeled to China to meet its insatiable demand and countries like Sri Lanka will be   given the second choice.
My contention is that the GOSL should call for worldwide tenders annually   for our projected coal requirements   from 2015 on a CIF basis. If the proposal of the BOI is accepted it will be another disaster like the hedging deal of the Ceylon Petroleum Corporation, a few years back.

Finally, dependence on coal should be minimized by a more acceptable energy mix as recommended by ADB for electricity generation.

(The writer is a retired Economic Affairs Officer United Nations ESCAP and a senior mineral economist and can be reached through [email protected] )

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A critical analysis of equity investments in foreign coal mining companies by GOSL

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