Anil Agarwal close to restarting Sesa Sterlite iron ore mines

Mumbai: Sesa Sterlite Ltd, controlled by billionaire Anil Agarwal, is close to restarting some of its iron ore mines in India as early as next month after a two-year shutdown shrank its revenue to the least since 2008.

“Sesa has met requirements for a permit to extract the raw material in Karnataka, which accounted for about one-fifth its 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 Ltd, the nation’s third-biggest producer of the alloy. The raw material accounted for 98% of earnings at Sesa Goa Ltd, which in August merged with another Vedanta Resources Plc. unit Sterlite Industries (India) Ltd 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 will be seen once the iron ore business adds to its earnings.

Sesa Sterlite is scheduled to report second-quarter results on 31 October.

Cairn investment

Agarwal bought 58.76% of Cairn India Ltd, 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% of Cairn India, earned Rs.625 crore ($101.6 million) from its share in the unit, helping it post a profit in the quarter to 30 June.

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 tons a year in Karnataka, about 38% 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.

Share rally

“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 in an earnings call in July.

Sesa Sterlite shares rose 0.1% to Rs.198.80 on Thursday in Mumbai. The stock has risen 1.7% this year, compared with a 6.7% gain in the benchmark S&P BSE Sensex. Sesa Sterlite completed the merger process in August after securing court approvals.

The shares have rallied 53% since mid-August after a local court approved the merger of the two Vedanta units.

“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 will 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.

Weaker currency

Sesa’s produce will be sold through an online auction process that’s being monitored by a court-appointed panel, the people said. An 11.7% decline in the local currency against the dollar in the fiscal year that started 1 April 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 11 October 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 Ltd, two people with direct knowledge of the matter had said on 24 July.

‘Key catalyst’

Goa banned mining in September last year after a government-appointed panel said the province lost Rs.34,940 crore 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 in building a 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. Bloomberg

RANJAY KUMAR

PGDM 1st year