Billionaire back at mines
Oct 25 2013
Sesa Sterlite meets norms for permit, set to resume iron ore mining in Karnataka
Sesa has met requirements for a permit to extract the raw material in Karnataka, which accounted for about a fifth of output, two officials familiar with the matter said, asking not to be identified before an announcement. The nation’s top court, which banned excavation in the southern state and neighbouring Goa amid environmental degradation, said in April Sesa needs the consent of federal and state governments to commence operations.
A resumption of mining may help ease the iron ore shortage faced by local steelmakers, including JSW Steel (JSTL), the nation’s third-biggest producer of the alloy. The raw material accounted for 98 per cent of earnings at Sesa Goa, which in August merged with another Vedanta Resources (VED) unit Sterlite Industries (India) to form Sesa Sterlite. Dividends from investments have helped Sesa report quarterly profits.
“They aren’t firing on all cylinders right now, especially in their iron ore business,” Alan Greene, a Singapore-based analyst at Moody’s Investors Service, said in a telephone interview. “They are relying too much on dividends to prop up their balance sheet. The full benefit of the merger would be seen once the iron ore business adds to its earnings.”
Shares of Sesa Sterlite, which is scheduled to report second-quarter results on October 31, rose 1.8 per cent to Rs 202.35, its highest level since January 7, at the close in Mumbai. The benchmark S&P BSE Sensex fell 0.2 per cent. The stock has risen 3.5 per cent this year, compared with a 19 per cent decline in the S&P BSE Metal Index. Sesa Sterlite completed the merger in August after securing court approvals and its shares (SSLT) have rallied 55 per cent since then.
Agarwal, who has a net worth of $3.3 billion, bought 58.76 per cent of Cairn India (CAIR), an energy explorer, as attempts to develop his copper, aluminum and iron ore business in the South Asian country were undermined by environmental regulations and remote tribes inhabiting bauxite-rich regions. Sesa, which owns 20.09 per cent of Cairn India, earned 6.25 billion rupees ($101.6 million) from its share in the unit, helping it post a profit in the quarter to June 30.
The court has allowed Sesa, which was India’s No. 1 exporter of the material prior to the court-ordered ban, to mine as much as 2.29 million metric tonnes a year in Karnataka, about 38 per cent of its original capacity. The potential revenue from the mines in the state is estimated at about $305 million, according to calculations based on data compiled by Bloomberg and spot prices at Tianjin port in China.
A ban on outbound shipments of iron ore still remains in force in Goa, the nation’s biggest exporter of the commodity. Karnataka is the country’s third biggest. Sanjeev Verma, a spokesman at Sesa Sterlite declined to comment on when the company could restart mining. The Vedanta unit can reach its target in four to five months, Executive director, Prasun Kumar Mukherjee said on a July earnings call.
The company won the environment ministry’s approval in August and is working with the Karnataka government agency to get final permits, one of the people said. Once allowed, it would add to 17 operational mines in the province with capacity of 15 million tonnes annually, which falls short of the 30 million tonnes needed locally, one person said.
Sesa’s produce will be sold through an online auction process that’s being monitored by a court-appointed panel, the people said. A 12 per cent decline in the local currency against the dollar in the fiscal year that started April 1 discouraged imports of the steelmaking ingredient, worsening the shortage.
A weak rupee and a supply shortage of iron ore in Karnataka may push up domestic prices in the near term, Rakesh Arora and Sumangal Nevatia, Mumbai-based analysts at Macquarie Capital, a unit of Australia’s largest investment bank, wrote in an October 11 report.
JSW Steel, which operates its biggest unit in the state, sources the raw material in auctions and doesn’t own a mine, prompting it to consider buying the local assets of Stemcor Holdings, two people with direct knowledge of the matter said on July 24.
Goa banned mining in September last year after a government-appointed panel said the province lost Rs 349.4 billion because of illegal extraction, forcing all companies including Sesa to suspend operations. The following month, the Supreme Court banned mining and sales of the ore in the state. The resumption in Goa can be a “key catalyst” that could substantially improve earnings and drive the re-rating of Sesa Sterlite’s stock over the next one year or so, according to the Macquarie note.
Setbacks in India have prompted the company to seek mines overseas. Sesa is in the process of investing as much as $2.4 billion to develop assets in Liberia in its first overseas expansion.
The company will use the money over the next four years to build 30 million tonnes of mining capacity in three properties in the west African nation. The first part of the project is scheduled to start by March 2014 with 4 million tonnes capacity.
“Sesa’s iron ore mining business is under ban currently but at $20 a ton free-on-board costs, it is highly competitive,” according to the Macquarie note.