Coal mines invariably top the agenda for companies looking to tie up fuel supply. The move by GMR Energy, one of the units of GMR Infrastructure, to acquire a 30 percent stake in Indonesian firm PT Golden Energy Mines Tbk for as much as $550 million in cash, is essentially a step in that direction. The upcoming transaction is expected to boost GMR’s coal asset portfolio.

As part of the deal, GMR has also signed a coal offtake agreement with the Indonesian firm, which entitles it to lift coal for 25 years, starting 1 January, 2012, with the annual offtake quantity steadily going up to 10 million tonnes over the coming years.

But why does this really matter? Coal prices are currently hovering around $120 per metric tonne (mt), which has spiked 25% over the past one year. Power companies that rely on coal to power their thermal power plants would have to secure the supply at a decent price to make their projects viable.

Lately, any assured supply from domestic miner like Coal India is unlikely. For example, in the case of Adani Power, 30% of the coal linkage for the ambitious Mundra Project, is no longer available from Coal India. This means the company would have to go for imported coal.

To add to this, Indonesia has decided to push up prices of coal exported from that country through new regulations. This is likely to hurt 13 Indian independent power devleopers, according to the Business Standard. A total capacity generation of 13,000 megawatt (mw) is likely to be affected. These include projects of Tata Power and Adani Power, among others.

India’s power generation capacity is expected to grow at a 6.5% compounded annual growth rate over the next five years, or an average of 12 gigawatt (12,000 mw) annually. Of this, investment bank UBS expects coal-fired capacity to account for about 67% of the total, wind 12% and gas 8%.

The total coal import in 2010 was 55 metric tonne (MT), which is 13% of the total supplies. This is likely to climb to 186 MT or 31% of the total supplies over the next 4 years.

Acquisitions could be tricky

Acquisition of mines is basically designed to secure the supply. However, in the case of Tata Power, Bumi mine, Indonesia, is proving to be a tough nut. The company was hopeful of getting up to 3 million tonnes of coal supplies at a price of $35 per tonne for the first five years. But with Indonesia imposing new export duties, thus pushing up prices of coal, the pricing is unlikely to be that reasonable.

Despite this, companies with large balance sheets continue acquiring resources targets. Macquarie Bank lists a few coal mines in Indonesia and Australia as potential targets. They include Harum Energy (market cap $ 2.8 billion, Bayum Resources ($8.3 billion) in Indonesia and Whitehaven Coal in Australia ($3bn).