Aditya Birla Group to buy Colombian mine stake for $1 bn

Written by Baiju Kalesh | Mumbai | Updated: Jun 14 2012, 09:27am hrs
The Aditya Birla Group is in talks with American thermal coal miner Drummond Company to purchase a significant stake in coal mines in Colombia owned by the privately held company. The Kumar Mangalam Birla-promoted group wants to strengthen its mining business and utilise the coal for its captive power plants to make aluminium in India, a person with direct knowledge of the development said.

The group is looking to own rights of anywhere between 20% and 40% of the coal produced in these mines and this may need an investment of $1 billion, the person said. The ownership will also help the group hedge itself against price volatility in the global coal market.

We do not comment on market speculation, Tuhin Mukherjee, managing director, Aditya Birla Natural Resources, said.

Indian power producers need to purchase overseas coal mines as there is a shortage of coal," said a former managing director of a power producing company. Demand will grow faster as India plans to add 1 lakh MW according to the government's five-year plan and Coal India will be unable to meet this demand.

The Aditya Birla Group's flagship company and aluminium maker Hindalco has been seeking environmental clearance to begin mining coal from the Mahan coal block in Madhya Pradesh to feed its 750-MW captive power plant to make aluminium. The company is building a 359,000-tonne new aluminium smelter project at Mahan.

Hindalco was allotted the coal block in 2006, for which environmental clearance was given in December 2008. Development work was halted after the area was declared a no-go zone in January 2010. The Forest Advisory Committee considered the proposal four times between July 2008 and December 2009, but it could not arrive at a final decision.

On May 30, 2012, a group of ministers gave conditional approval for Hindalco to start mining at the site. The company's smelter project at Mahan was expected to start this fiscal.

Debu Bhattacharya, managing director, Hindalco, said the smelter would start operations with purchased coal if environmental clearance for the Mahan coal block was not received in time. It will still take the company at least 12 more months to begin coal production from the mine.

Ultra mega power producers, which have to sell power at fixed tariff under an agreement with the government, are finding it tough to stay profitable while using expensive imported coal. Higher coal prices, taxes and royalties by various countries have made it unviable to produce power with imported coal although thermal efficiency is higher.

It makes sense for the Aditya Birla Group to buy overseas coal mines to feed its captive power plants as that would cover the cost, said an analyst from a domestic brokerage. It can also gain from the rise in prices in the international coal market.

The group, which trades in iron ore though its privately owned Essel Mining & Industries, is also scouting for iron ore mines in Africa as part of its trading business. Essel Mining's net profit in fiscal 2011 rose by 26% to Rs 688.79 crore from Rs 543.72 crore in the previous fiscal, even as the company's annual turnover fell by 9% to Rs 2,266.34 crore from Rs 2,487.88 crore.

The company will continue to sustain its revenues and earning in the years to come. However, there may be fluctuations due to the problems in the euro zone, which may affect exports from India and moderate the flow of capital into the country, Essel Mining said in its annual report filed with the registrar of companies.

Other factors like the pricing strategy of major global players, withdrawal of stimulus packages, tightening of monetary policy in various countries, high interest rates, rising petrol prices and inflation may constrain the demand globally.

The overall economic growth is likely to remain robust. The company should be able to maintain its standing as a key player and one of India's largest merchant iron ore mining company, the report added.