Rel Power seals Indonesian mines buy

ANIL Ambani-owned Reliance Power has signed a share sale agreement with Indonesia’s Sugico group to acquire three coal mines in a transaction that will involve a series of production-linked milestone payments. Reliance Power’s wholly owned subsidiary, Reliance Coal Resources Ltd, will make an up front payment of Rs 500 crore ($106 million) for acquiring the mines. The balance payment will be paid in a staggered fashion, depending on whether the mines meet certain production targets. If all production-linked targets are met, the total value of the deal will be $1.6 billion.

    The Indian company had, in 2008, entered into a definitive agreement to acquire 100% economic interest in these three coal mines and the share sale agreement signed earlier this week marks the closure of the transaction.Speaking to PTI from Indonesia, K Leo, chairman of the Sugico group, said the deal was ‘winwin’ for both sides. “The partnership with Reliance will improve the valuation of other assets in the region. I have met Anil Ambani and I am very confident of his commitment,” said Mr Leo, when asked about his faith in the staggered payment mechanism. The three mines located in the South Sumatra province were owned by PT Sriwijaya Bintangtiga Energi and PT Brayan Bintangtiga Energi subsidiaries of the Sugico group.

The coal from this region will not only ensure steady supplies for the proposed Krishnapatnam power project in Andhra Pradesh, to be based on imported coal, but will also be cost effective. Back-of-the-envelope calculations show that the cost of this coal will work out to be almost 35% cheaper than other imported coal. The quality of coal with a calorific value of 4,000 kcal (as compared to 2,800 kcal in India) and an ash content of just 3-5% will come as a major advantage to Reliance.

The mines have production licences and Reliance will now have to work towards the production of coal. It is estimated that the mines would be in a position to begin production in another three years. Reliance’s technical partner, North American Coal Cooperation, will be partners in the development of the mine.

The staggered financing mechanism will suit the Anil Dhirubhai Ambani (ADA) group which has invested heavily in several diverse projects and a large one-time cash out flow could pose some difficulties, a leading energy analyst said. However, Reliance Power reported a cash flow of Rs 9,000 crore in the last quarter.

The Anil Dhirubhai Ambani group, which has interests in logistics and infrastructure, will also help in the development of a dedicated custom built railway line to transport coal from the mines to a proposed port in Jambi in the Sumatra province. The designated port in Jambi will be capable of handling large, capesize vessels (180,000 MT)

Indonesia, a mineral-rich country, particularly in coal, has recently notified new rules according to which mining blocks will only be given through auctions, as opposed to nominations. Other Indian power companies like NTPC and Lanco have also been holding talks with the Sugico group.