Auction of Schedule II Coal Mines

Auction of Schedule II Coal Mines Queries & Responses To Standard Tender Document Dated December 27, 2014 Part V (Iron & Steel, Cement and Captive Power Sector specific queries) Nominated Authority Ministry of Coal Government of India New Delhi January 17, 2015

Queries and Responses to Standard Tender Documents for Iron and Steel, Cement and Captive Power Plant Sector 1 10.3 Annexure III Illustration with respect to compliances and eligibility Where there is more than one specified end use, for each specified end use plant, the details of specific coal consumption, expenditure & total cost shall be provided separately. While it may be possible to give specific coal consumption separately for each type of EUP, it may not be possible to bifurcate expenditure incurred and total cost separately. In our case it is not possible to bifurcate expenditure incurred on sponge iron, WHRB and coal fired captive power plant. Similarly project cost covers DRI, WHRB and coal fired CPP and cannot be bifurcated as number of facilities are common. The sponge Iron with WHRB and coal fired CPP should be considered as one project for expenditure & total project cost. 2 Clause 3.10.2 The aforementioned payments shall be subject to a yearly escalation on the basis of a Reference Index.. From where, we shall found the "Reference Index" of last three years, which were published in first week of April?, the said Reference Index is being considered for annual escalation. As per Tender Document. While iron & steel, cement and captive power generation are separate end uses, if captive power is utilised for the end use of production of iron & steel or cement, then total requirement of coal can be taken into account. It is clarified that where there is more than one specified end use, for each specified EUP, combined project cost and expenditure may be provided for the specified EUP. As defined in the Tender Document, Reference Index for this purpose is Wholesale Price Index which may be referred to from the website of Office of Economic Advisor, DIPP at www.eaiindustry.nic.in 2

3 Polyester Manufacturer: 1. Whether any minimum quantity has been fixed for participating in the bidding process. 2. Besides CPP, coal is being used for CFHTM ( Cold Fired Heat Treatment plant) & utility boilers which is used for generation of steam to use in our manufacturing process. Please confirm the eligibility of our CFHTM & Utility boilers to be fall under the non regulated sector. 3. Are iron and steel, cement and captive power generation to be treated as different specified End Uses or a one specified end use under non regulated category? 4. As mentioned in the ordinance that by notification the other end use can be defined. Hence a notification can be immediately passed elaborating the point as: " such other end use like coal gassifier used as fuel in manufacturing of pellet, which facilitates the production of sponge iron". OR issue a clarification under point no 1 "production of iron and steel which includes iron ore pellet, iron ore sinter, sponge iron / DRI" The notification can be specific by stating that such plants must use such intermediary products in manufacturing of iron and steel either by self or through its subsidiary / associate (Affiliate) company.in this regard can be issued in addition to the ordinance or may be a clarification from central government in this regard will suffice. 5. We understand that CF HTM plant has not been treated and not included as CPP in the approach Paper For Auction/Allotment of Coal Blocks under Mines (Special Provisions) Ordinance, 2014. We would like to bring this into your kind notice that the objectives of CPP and CF HTM plants are same i.e to use coal for generation of energy for captive manufacturing facility. Therefore, we are of the firm opinion that CF HTM should be treated similar to CPP and it should be included as part of CPP in coal blocks bidding through E auction in non power sector. 6. Whether CPP includes coal benefication? Refer Clause 4.1.2 (b) for eligibility on the basis of coal requirement and Clause 2.3.1 for specified end use, of the Tender Document. While iron & steel, cement and captive power generation are separate end uses, if captive power is utilised for the end use of production of iron & steel or cement, then total requirement of coal can be taken into account. 3

4 Clause 4.1.2 (b) Eligibility on the basis of coal requirement 1. What is the benchmark factor to be used to determine Annual coal requirement for a Specified End Use cement plant? Will it be linked to cement capacity or clinker capacity? 2. Clarification is required as regard to whether the coal requirement of Ferro Alloy Plant and Coal Gasification Plant, (being used in process of production of iron and steel) can be taken into consideration for computation of Annual Coal Requirement. 3. As the coal requirement of Sponge Iron Plant is not very huge as is the case with Power Plant,limiting the quantity will reduce the no of coal blocks to be bid by the party and there will be not be many coal blocks available to bid as all the blocks have large reserve. 5 Clause 3.3.2 (c) The Applicable Floor Price for electronic auction shall be the highest Initial Price Offer received from the Technically Qualified Bidders. Ministry of Coal shall provide the specific consumption norms for each type of End Use. 1. For a cement plant, coal requirement shall be assessed on the basis of clinker capacity. 2. Annual Coal Requirement should be assessed for specified end use only. 3. Eligibility on the basis of coal requirement shall be as per Clause 4.1.2 (b) of the Tender Document. Tender Process shall be conducted in accordance with the Tender Document. The Floor price should be taken as 3rd Quartile number out of the Initial Price offers received from the Qualified Bidders. 6 Clause 4.1.1 a joint venture company formed by two or more companies having a common specified end use and are independently eligible to bid in accordance with this Ordinance 1. The clarification is required to understand permissible bidding structure as in case of Cement and Iron & steel, 2 Specified End Use i.e. CPP and Cement/Sponge Plant would be under same complex and same ownership with different coal requirements. Hence, kindly clarify possible arrangements. 2. Can JV be formed between two companies under unregulated category? e.g. Cement and CPP 1. Specified end use and specified end use plant shall be in accordance with the Tender Document. 2. JV can be formed by two or more companies having a common specified end use. While iron & steel, cement and captive power generation are separate end uses, if captive power is utilised for the end use of production of iron & steel or cement, then total requirement of coal can be taken into account. 4

7 Clause 5.7.2 1. As per Clause 4.1.2 (b) of the Tender Document. Entitlement Any coal which is extracted in excess of the entitlement of the Bidder in terms of this Tender Document shall be is 150% of the annual coal requirement of the Specified End Use required to be supplied at CIL at the CIL Notified Price. 1. Please provide the definition of entitlement. Does entitlement refer to annual quantum requirement of EUP at 85% Plant(s) at 85% plant load factor or capacity utilization as the PLF/capacity utilization or at 100%? case may be, taken over a period of 30 (thirty) years. 2. Owing to market factors, sometimes the coal production may be higher or lower than end use plant demand. This is in 2 4. As per Clause 5.7.2 of the Tender Document. contradiction to section 5.1.9 wherein it says that bidders will be encouraged to mine at higher rate, based on their 5. As per Tender Document and Applicable Law. capability. Excess coal upto 25% of Mine capacity may be allowed to be transferred to another company for similar End Use at a price to be determined by MoC/Coal Regulator 3. The bidder is being obligated to sell the surplus coal to CIL only. This could be reviewed and mechanism to ensure adequate compensation for such coal is paid should be put in place. If the actual cost of production is higher than the Final Price Offer/ CIL price, the bidder is being obligated to bear losses and sell to CIL 4. Supply of excess coal to CIL at CIL Notified Price should be replaced by alternative selling price as and when pricing framework for commercial mining is developed. Since the unregulated sectors are on forward auction basis, they should follow the same commercial framework as commercial mining as and when the same is opened up. This will allow for an alignment of the existing auction model with that of commercial mining models. An enabling provision for the same needs to be put in the current Agreement 5. Whether other additional levies and duties including VAT and Royalty would be added in the price of Coal being supplied at CIL? (1 If this clause is to be applied, the following guidelines must apply: a) The Mine allocatee shall be allowed to build stock equivalent to 3 months of its approved mine plan for that year and excess shall be computed after making allowance for the stock build up. b) It is understood that this clause will be applicable only if the Mine Allocatee is not able to use the mined coal in its other same Specified EUP(s), which is allowed as per the Coal Ordinance and Rules. c) In cases, where the Mine Allocatee processes the coal in its washing/beneficiation plants, CIL entitlement to excess shall still be with respect to ROM quantity and CIL shall take only the unwashed/unprocessed coal. d) In respect of the excess computed for a particular year, the allocate should be given period of next 12 months to adjust this excess either by way of adjusting the output from its mine or by consuming such excess in the Specified EUP or its other same specified EUPs as per point b) above. e) Any coal which is extracted in excess of the entitlement of the Bidder in terms of this Tender Document shall be required to be supplied at CIL at CIL Notified price + other allowable charges in mining including but not limited to for sizing, stockpiling, internal transportation etc and other additional levies and duties including Royalty and VAT as applicable.bid price shall be escalable using the prescribed escalation formula(if escalation is finally made applicable) f) CIL shall have to lift the coal using its own transportation system with in a period of thirty days from the end of the year otherwise, the entitlement of CIL for purchasing such excess will lapse. However, it is made clear that allocate shall not be allowed to sell any part of such excess coal to any party and can only use the coal in its Specified EUP or other same Specified EUP(s) as per point b) above) 5

8 Clause 4.1.2 (b) Annual coal requirements of the specified end use will be.. at 85% of plant load factor or capacity Annual coal requirement to be assessed in accordance with Tender Document. PLF is for captive power plant and Capacity Utilisation is for Iron & Steel and Cement Plants. utilisation, whichever is higher. 9 Clause 3.10.2 The aforementioned payments shall be subject to a yearly escalation on the basis of a Reference Index.. As per Tender Document 1. Since the blocks are being allocated through the auction process, a bidder bidding today may have limited view on escalations that may get applicable in the future. This would lead to uncertainty for the bidder. Further, globally commodity prices are going down, thus it is requested that no escalation should be applied on bid price since a fair auction process will ensure that it is priced in in the winning bid price. 2. Since the price in the bid would be discovered through a transparent process, a subjective factor like the escalation should not be imposed over this. It is requested that price discovered through bid process should be maintained and no subjective factors should be applied to values determined through a bid process. 10 Clause 1.1.7 Initial Price Offer This definition is inconsistent with 3.3.2 a). Clause 3.3.2 a) states that Initial Price Offer should not be less than the Floor Price while the definition of Initial Price Offer states that it must be higher than the Floor Price. Initial Price Offer definition must be consistent with clause 3.3.2 a) Clause 3.3.2 (a) of the Tender Document to be read as: Clause 3.3.2 (a) Technical Qualification: In the first stage, the Bidders would be required to submit: (i) the Bid Security; (ii) the Technical Bid in substantially the same format as specified in Annexure III along with a covering letter in substantially the same format as specified in Annexure IV; and (iii) the Financial Bid to the extent of specifying the Initial Price Offer, which should be higher than the Floor Price. 6

11 Clause 3.3.2 (e) Notwithstanding the above, in the event that the Nominated Authority or the Central Government determines that a Preferred Bidder should not be declared the Successful Bidder on account of any reason whatsoever As per Tender Document This is highly arbitrary and there must be an objective criteria, including without limitation the withdrawal of the Preferred Bidder from the auction process for the Coal Mine or the Preferred Bidder ceasing to comply with the Eligibility Conditions, then the Coal Mine may be subjected to reauction or being granted to the custody of a Designated Custodian, and this tender process may be annulled. 12 Clause 4.1.1 in case a company is the successful bidder, then the entitlement to receive coal pursuant to such coal linkage shall stand proportionately reduced on the basis of the requirement of coal being met from the mine allocated to such company.. It may be noted that for this coal block, as per the extraction rate of current mining the remaining reserve will only suffice for 17years. This has to be revised for 30years and accordingly mining extraction rate will get revised and hence finally the mining plan. The mining extraction rate of chotia block (once the mining plan is revised to block allocation duration of 30years), is coming as 0.56 MTPA. In our case the coal requirement is 0.8MTPA for sponge iron units. The linkage (if we don't consider the tapering policy and linkage on normal basis) is only 75% of the total coal requirement which will be 0.6MTPA. Hence if through block 0.56MTPA is extracted then the linkge should only get reduced to "actual requirement of EUP less coal requirement met by block" and not as stated in ordinance "linkage should proportionately get reduced by the coal being met from the mine." In our case, if we are awarded with chotia block then instead of linkage getting reduced to (0.6 0.56 = 0.04MTPA), it should get reduced as (0.8 0.56 = 0.24MTPA). 13 Please provide product split, price and operating cost assumptions of Ministry for arriving at NPV. Whether the project Bidders are allowed to conduct due diligence expenditure incurred by earlier allottee on itmes like land, P&M, Drivage, PR/GR/Permits clearances, approvals etc)should be kept out of consideration for working out intrinsic value of the mine(npv)? The PRC as per the present approved mining plan cannot be revised downwards. However, utilisation of coal shall be permitted in accordance with Clause 5.7 of the Tender Document. As per Rule 10 (4)(d)(iv). Financial model of CMPDI assumes costs based on the data recovered from mines of CIL. The bidders may have different views of the value of coal as well as different cost parameters. 7

14 We are required to pay 10% of Intrinsic value as upfront amount (in 3 phases) and balance 90% will paid by way of Royalty monthwise based on the actual extraction & FPO. Whether this monthly payments will continue till we reach the 90% of Intrinsic value i.e whether monthly payments will be stopped once 90% of intrinsic value is paid to the Govtt. Monthly payments are required to be made with respect to coal extracted in accordance with Clause 3.10 of the Tender Document 8