Coal mining cost low from Gare Palma IV/7: Monnet Ispat

“The block is also just 55 km away from the end-use plant, so it’s a good buy for us,” he adds.

Below is the verbatim transcript of Sandeep Jajodia's interview with Sumaira Abidi & Reema Tendulkar on CNBC-TV18.

Sumaira: From what we understand you were quite aggressive in this bid so we want to understand from you now why is it that you were so keen on this block, isn’t it that it has a slightly inferior grade?

A: That is true but the question in front of all prior allottees of coal blocks is that should they shut their plant or should they get a coal mine to run it. The thing is that prior allottees have been given a very step-brotherly treatment for example sponge industry, the sponge industry came into being only post allocations of coal blocks. They were given coal blocks by the government and then they were asked to put up their committed investments.

All of us have put thousands of crore as investment and suddenly the coal blocks were taken away. Now, we have compete with other sectors such as aluminium, like captive power plants have been asked to bid in the same blocks which were allocated for iron and steel, cement has been allowed to bid in the blocks which were meant for iron and steel. So, we don’t have a choice. We have our back against the wall and we have only question to say should we shut our plants and render 2000-4000 people out of job or should we take the block at any cost; that is the only option left in front of us.

However, having said that, it is expensive but the mining is very easy; the mining cost is low because it is open cast mining. There is a washery in the mine itself which can be used then to enhance the grade of the coal. So, things can be worked around as far as costs are concerned. Why we went for it? I would say in one line we had no other choice.

Reema: You lost Gare Palma IV/5 but you won IV/7 and what we understand is that the new mine has a higher capacity from what you earlier had. Can you tell us what the coal requirement is and now what will be the landed cost from the new coal mine?

A: First of all to answer your question -- we, as a company, are eligible for this mine. So obviously that is the reason that we were technically qualified. So the reserves of the mine completely soothe our requirements.

Part two is that as I said, we will increase the grade by washing the coal and bring it to our plant. Our plant is only 55 kilometres away from this mine. This mine is just next to our current mine, which is IV/5, which we lost. So we share the boundary with the current mine. So the logistic is the same, the cost is the same. It is not much difference except the grades are lower which we, because of the washery being in the mine, will enhance.

In fact, if I could go one more step, end of it, we would be a little bit cheaper then to have brought coal from the mine at the rate at which it had gone upto.

So IV/5, Hindalco went up to Rs 3,500 that is completely prohibitive, it is completely unviable for sponge iron industry.

Another thing I would like to underline here is that for the aluminium industry, this is a fuel, coal is a fuel. For the sponge iron industry, it is a raw material. So there is a huge difference. For them the raw material is bauxite. They use the coal to fuel their power plant to run their smelters. Power plants require low grade coal. The blocks allocated for iron and steel have relatively higher grade coal because sponge iron industry can only use higher grade of coal because for them it is a raw material, not a fuel. So it is an unfair competition and it is completely unfair to the existing sponge iron industry.

Sumaira: Can you give us a sense of how you are planning to fund this purchase of your coal block?

A: We have to give a bank guarantee, so we will approach our working capital bankers. I am sure they will be very supportive because it is only going to add revenue to the company. It is only going to help the company enhance its production of coal or sponge iron and thereafter steel. So I don’t see any difficulty. We have to only give a bank guarantee and then we have to give this premium, which I have quoted on per tonne basis as we mine. So we mine, consume this coal in our sponge iron, sell the coal, get the money and pay the government.

So it is going to be a part of the -- it is just that our costs have relatively gone up. But Monnet Ispat as a company will not get so much affected because we have just about to commission our iron ore pellet plant. That will bring down our iron ore cost dramatically. So to a large extent, the margins were taken away by coal but we will yet be lower than the cost we had till a few months ago. We don’t lose in the bottomline.

Reema: Just a few numbers. Can you tell us the extent of bank guarantees, can you give us the number that the company has to furnish and you indicated that because of the Iron Ore pellet plant your cost would come down; by how much?

A: Coal is going to add about Rs 2,000 cost for us per tonne of sponge iron and the iron ore is going to come down by Rs 3,000. So we will be a net saver of Rs 1,000. Now we put up the pellet plant and we have put up a Rs 500 crore investment to actually come down by Rs 3,000 because we never expected such a strange situation where the coal mine would be cancelled and we will have to bid for it. So out of the Rs 3,000 we will have to give away Rs 2,000 to coal but we will still yet be a net gainer of Rs 1,000. So, instead of Rs 3,000 we will get reduced to Rs 1,000.

Sumaira: So you have got a lot of capacity that have come onstream. I understand maybe because of that but your finance costs are almost 20 percent of your topline. What is the plan to bring down your debt, I mean how much debt you have currently?

A: What we are doing is we are going through a kind of restructuring of our finances where we are trying to put in some EPCG guarantees because we have some exports in the company and we are trying to discount those exports and take some foreign loans and repay our rupee loan which will have an effect of almost about 300 basis point on our interest cost and we are also trying to reduce costs by selling some non-core assets. So we are trying to sell some noncore assets, get in some cash, payback to the banks and make an overall adjustment in the next six months bring down our net debt by almost about 20 percent, so that is plan number one.

Plan number two is that we are not really overleveraged because we are a 1.5 million steel mill. We have got Rs 6,000 debt on our balance sheet which makes us Rs 4,000 per million. Now if you take other people in the peer group in the steel industry, the thumb rule is about Rs 6,000. So we are still quite well off. It is just that the markets are really bad currently and we are having difficulties to optimise the capacity which I hope with the new government coming in with all the talks of large infrastructure development etc steel demand will go up and we will be able to optimise the capacity. Having done that, I don’t see us much as an overleveraged company.