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Making Money off Coal's Poor Cousin

A monopoly enables lignite producer, GMDC to an enviable advantage over others…

GMDC is India's second-largest producer of lignite after Neyvile Lignite and primarily mines lignite which is a poor cousin of black coal. Owned by the Gujarat Government, GMDC has been conferred with a number of special benefits by the state, which allows it access to nearly all of the State's bauxite, lignite and manganese reserves at its mines in Panadhro, Rajpardi, Akrimota, Umarsar and Mata-nomadh. This makes GMDC a monopoly, as no other player has mining rights to these minerals and energy resources in the state of Gujarat.

GMDC's main area of operations is lignite mining. Cheaper than coal, this energy source is a boon for the local industry which has no known coal reserves, with the nearest coal mine 700 km away, which make it unviable to transport. The local industries in Gujarat depend on GMDC for their energy requirement.

Growth in the mainstay lignite is expected to be in the range of 14-15 per cent (volume growth) in the next two years. Much of the incremental production is expected to come in through its existing Bhavnagar and Mata-no-madh and new Damalai and Umarsar mines. Further, the company has plans to add six new mines in the next 2-3 years, something that the company management feels will help it grow in volumes by more than 10 per cent over the next few years. The company has got good assets, for instance, its main Bhavnagar mine has reserves of 69 million MT, where the mining capacity currently stands at 3 million MT with the approximate mine life of around 25 years.

GMDC by virtue of being the only player in the State has the ability to pass on price hikes to some extent and has no obligations to offer any subsidy. In terms of pricing, lignite is sold at a discount of 15-20 per cent to prevalent coal prices. The company last increased the price of lignite in July 2012, which it managed to exercise easily in comparison to the resistance faced by Coal India from its customers in case of a price increase.

The lion's share of earnings for GMDC come from lignite mining. GMDC has been trying to diversify its operations by entering into related mineral mining businesses like manganese, bauxite, zinc, copper and power among others. Take power for instance, GMDC commissioned a 250 MW power plant in Kutch, Gujarat in 2006 fuelled by lignite produced at GMDC's own Panandharo plant. From a meagre 1.5 per cent contribution to topline, power now accounts for 12 per cent of the company's business. And GMDC is not stopping at that; it is building a 150 MW wind power capacity of which 60 MW has already been commissioned and the remaining is expected to come online by the end of FY13, besides a 5 MW solar power facility that is fast coming up.

GMDC is a debt free company. Its earnings have grown at 24 per cent compounded annually in the last five years. The company has rewarded shareholders with a 28 per cent return (year-to-date), which is twice that of the Sensex for the same period. A proxy on the core energy sector, GMDC is like other energy companies discussed earlier a long-term hold.