Doubts on Coal India’s coal reserves

Coal India is set to begin a roadshow to promote what is expected to be India’s biggest stock listing, even as tightened environmental regulations and a Maoist insurgency threaten to render much of the state-owned miner’s reserves inaccessible.

The company’s biggest coal fields are located in remote regions dominated by Maoist rebels who often target business activities for extortion, disrupt roads and railway lines used to transport coal and are suspected of involvement in coal theft.

Moreover, the coal ministry has yet to persuade Manmohan Singh, the prime minister, to roll back an order by the environment ministry that this year designated areas covering about 40 per cent of Coal India’s reserves as “no-go areas” for mining to stop the wholesale felling of eastern forests.

“Although India has large reserves, actual production of coal has only been growing at 6-7 per cent per year,” said Arvind Mahajan, head of natural resources at KPMG.

Coal India hopes to raise up to Rs150bn ($3.2bn) from the sale of a 10 per cent stake. That would make its initial public offering bigger than India’s largest completed listing, the $3bn offering of domestic electricity producer Reliance Power in early 2008.

Coal India claims to be the world’s largest coal producer and accounts for 85 per cent of production in India, which has the fourth-largest reserves on the globe. But it recently revised down its annual production target from 520m tonnes to 486m tonnes, citing delays in environmental clearance for mine expansion. Meanwhile, Indian coal imports are surging, with KPMG estimating a domestic shortfall of 189m tonnes a year by 2015.

India’s coal ministry has urged Mr Singh to pare back the environment ministry’s designated “no-go” order to regions accounting for just 10 per cent of coal reserves. Coal India’s prospectus said the issue should be resolved in a few months through “mutual consultation”. But it said: “If we are unable to produce coal from such designated areas, estimates of our reserves could be adversely affected.” In its prospectus, Coal India admits to problems with insurgency and theft from its mines by illegal miners and others, especially in eastern regions with a heavy Maoist presence.

In spite of the problems, bankers expect a strong reception for the offering given its near monopoly status and demand from the power sector. “It just depends on the price,” said one person familiar with the deal.

Citigroup, Morgan Stanley, Kotak Mahindra Capital, Enam Securities, Deutsche Bank, and Bank of America-Merrill Lynch are managing the IPO. The offering is part of government plans to raise $8.6bn through stake sales in the fiscal year to March 2011.