Neyveli Lignite: Time to Stock Up

Every investor needs to understand--and invest maybe just a little--in alternative energy. This might mean wind power (Suzlon Energy, with its turbines, is the way to go here), bio-refineries or ethanol.

But my money's on Lignite. Yes--Lignite.

A new process takes low-grade, water-logged, $6-a-ton Tamil Nadu or Gujarat coast Lignite, and converts into a clean liquid fuel worth the equivalent of $ 77 a barrel.

The process is expensive but several factors make K-fuel, as it's called, work:

It cuts our dependency.

The West Coast especially Gujarat and the South Eastern state of Tamil Nadu with the Neyveli Lignite mines sit atop a larger store of energy than Saudi Arabia. It's simply in the form of Lignite, not oil.

Unfortunately, lignite is a poor cousin of Coal but this is where you should invest. No less than 140 new Lignite/Coal-fired power plants are about to be built over the next 5 years.

This is more than at any time since the 1950s. Lignite is the new favorite alternative to oil.

The biggest advantages with Neyveli Lignite are technical.

-After NTPC it is the largest power generating company in the listed domain.

-95 per cent of the Equity is with the GOI.

-2.8 per cent of the Equity is held by LIC.

-The Lignite Deposits in Tamil Nadu State can last another 130 years.

-Neyveli already produces close to 10 Mn Tonnes of Lignite a year and 1500 MW of Power.

-At a cost of Rs 5500 crore, the Mine capacities are to be doubled and Power capacities raised to 2500 MW over the next 3-5 years.

-The Corporate has tied-up with Private Sector concerns to tap the potential of Coal Bed Methane gas.

-It has undertaken mining leases in Gujarat, another State that has Lignite reserves that could last another 40 to 50 years.

-More importantly, Neyveli Lignite has entered into a JV with the Coal India subsidiary Mahanadi Coal Fields to open up new Coal mines in Orissa, where Neyveli will own a 30 per cent stake.

-Top it all, with converting Lignite into Diesel.

The biggest advantage of all, is the fact that Lignite is clean.

Lignite's big drawback has always been that it burns dirty. Clean it up, convert it into liquid diesel, and you've turned low-grade coal you'd otherwise discard in slag heaps into a $4-a-gallon at the pump high-test. Pure alchemy.

It's making early investors rich.

Call it the Spindletop Effect. The U.S. company that has lead the K-fuel revolution is up 73% in the last three years. Sooner or later both Neyveli Lignite and Gujarat Mineral Development should be tying up with the American Corporation for converting Lignite into Oil. The last three years prove that the technology is viable and can be replicated elsewhere.

Oil is at $ 77 for starters. And Sasol, the South African blue chip, has created a $20 billion business out of converting low-grade coal to diesel.
The fact that Sasol is also up 167% in three years tells you: the clean coal solution is for real.

Sasol signed a joint-venture with ChevronTexaco to produce a gas-to-liquid plant and GE has teamed up with American Electric Power to produce gas from coal by 2010.

More and more, it looks like coal--and especially clean coal--needs to be in your portfolio. GMDC has had its day in the sun, now topping Rs 1000 per share but Neyveli has been stuck in the Rs 54 to Rs 80 range for the last four years.

Time for Investors to stock up.