Yet another Indian firm is rushing into Africa. Hyderabad-based Nava Bharat Ventures Ltd (NBVL) is to spend a little over half a billion dollars to acquire a controlling stake in a government firm in Zambia that owns the largest coal mine in the country.
As part of the deal, NBVL will also have to set up a power plant and invest fresh money in the mine.
Though primarily conceived as a transaction that will earn the company more revenue by operating a mine and generating power abroad, it’s also an opportunity for NBVL to expand its global reach and earn additional revenue by selling surplus coal from this mine in adjoining markets.
The second global acquisition by NBVL, caution analysts, may prove to be tricky since it will also have to deal with labour problems and salary arrears.
The company won against rivals that included Vedanta Resources Plc, South Africa’s Londoloza Resources Corp., Borneo Mining SA, London-based Aldwych International Ltd and the Zambezi Consortium Ltd comprising investors from Mauritius and Zambia.
NBVL, which had some Rs1,168 crore of reserves as on 31 March, plans to fund the $550 million (Rs2,640 crore) acquisition with a 70:30 debt-equity ratio, said managing director P. Trivikram Prasad. “We plan to dilute our stake in the special purpose vehicle Nava Bharat (Singapore) Pte Ltd (NBS) to mobilize the necessary equity funds at an appropriate time,” he said.
The company acquired its first overseas asset, an Indonesian mining firm, in January through wholly owned subsidiary NBS.
The Zambian government had invited global bids, which closed in March, to privatize Maamba Collieries Ltd. The rider was that the winning company will also have to set up a 300MW power project, the fuel for which would be sourced from the coal mine, to meet the demand for power at the country’s copper mines.
“A consortium comprising NBS and a Zambian group bid against a global tender for a 65% equity stake in Maamba Collieries Ltd, a company held 100% by ZCCM IH, a government investment holding company of Zambia. The NBS consortium was chosen as the preferred bidder by ZCCM IH (ZCCM-Investment Holdings Plc),” G.R.K. Prasad, director (finance and corporate affairs) at NBVL, said over phone from Zambia on Thursday.
Apart from around $50 million to be paid to the Zambian government, setting up the power project will require an investment of around $140 million, and recapitalization of the coal mine and increasing coal production will require an investment of around $360 million.
Going by recent coal deals, if the reserves are not proven, the valuation of a mine is around 10-20 cents per tonne. For proven resources, it is 50-60 cents per tonne. Operational mines come with a much higher price tag of around $2-3 per tonne.
“Nava Bharat is on the verge of concluding a monumental deal with ZCCM-IH on Maamba Collieries to establish a coal power station,” Andrew Chipwende, director general of Zambia Development Agency, said in an email response.
“These are distress assets and there are a lot of liabilities. The coal will be mined and sold there,” said a person aware of the development, who did not want to be identified.
Workers at the mine have not been paid for months and production has been hit.
NBVL posted a net profit of Rs520.57 crore on sales of Rs1,350.05 crore in 2008-09. On a paid-up equity of Rs15.22 crore, the company’s reserves stood at Rs1,168.24 crore as on 31 March.
“The transaction is likely to be consummated by December 2009,” G.R.K. Prasad added.
Managing director Trivikram Prasad said, “The process is expected to take (a) couple of months and a purchase-cum-sale agreement with the Zambian government could be inked before the year-end. The priority would be on mining activities in the first phase. (The) power project would come up in the second phase and would take off within three years.”
At present, Zambia’s copper mines consume up to 60% of the country’s power generation of around 1,600MW, and many of them have suffered on account of nationwide power failure in January.
Analysts say coal mining costs are expected to rise due to demand pressures on equipment and human resources in particular, but the sector will still hold value for investors who choose to mine rather than purchase at prevailing market rates.
“A lot of Indian companies are making efforts to get into African markets, which is resource rich and is the market of the future,” notes Kuljit Singh, a partner at audit and consulting firm Ernst and Young.
The NBVL stock on Friday gained 4.27% to Rs379.50 at close of trading on the Bombay Stock Exchange. The exchange’s benchmark index, the Sensex, lost 0.53% to 16,693 points.