Uncertainty for investors in Lanco Infratech continues as the company is embroiled in a legal tangle with clients of its newly acquired arm Griffin Coal.
The stock lost 10 per cent in a single day following a A$3.6-billion (Rs 16,700 crore) suit slapped by Australia's Perdaman Chemicals on Lanco Infratech.
Perdaman's claim for damages amounts to three times the current market capitalisation and book value of the Lanco Infratech stock. Whether Lanco will be required to shell out this sum is subject to a lot of uncertainty, but the stock may continue to trade at a steep discount (it is trading at close to P/BV of one) to its peers until it comes out of this litigation.
The company's stock is down 65 per cent in one year, underperforming for much of this period due to high interest costs and fuel risks.
The acquisition
In February, Lanco concluded a $760-million acquisition of Griffin's coal assets, which gave the company access to 1.1 billion tonnes of good quality coal in Western Australia.
While the current production from these mines is to the tune of 4 million tonnes per annum (mtpa), Lanco had earlier stated that it would ramp-up the production to 15 mtpa going forward. The idea of the acquisition was to support its thermal power generation plants in India (close to 7,000 MW of coal-based power projects under construction or operation).
Coal supply pact
Griffin Coal in December 2010 had signed a 25 year fuel supply agreement to supply up to 2.95 million tonnes a year of coal to Perdaman's urea plant starting 2014 when it was to get commissioned.
According to Lanco's management, the agreement was not terminated from their side. However, what may have sparked this action by Perdaman is reports of Lanco attempting to re-negotiate a coal supply agreement signed by Griffin with Australia based Bluewaters power plants. Coal prices (33 per cent rise in Australian coal spot prices) have been on the rise and Lanco may have wanted to take advantage of the same.
Perdaman's suit now claims damages equal to the value of its yet-to-be commissioned urea plant, which was to be based on coal as feedstock. The plant, Perdaman claims, is yet to receive financial closure, pending definitive feedstock supply.
Perdaman has already entered into a 20-year supply agreement for urea with Incitec Pivot. The company had signed a similar coal supply agreement with Griffin Coal before its collapse in January 2010.