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Sesa Goa – Volume impasse
Several events over the last few months such as Karnataka's iron ore export ban, termination
of Orissa operations and the Goa mining-lease moratorium have created uncertainty over
Sesa Goa's volume growth. Hence, plans to reach 40mt by FY13 face serious hurdles. We
cut our earnings 14-15% for FY11-12. Buy.
Volume impasse
Since end-July, there has been a string of negative triggers for Sesa Goa including: 1) a ban
on iron ore exports from the state of Karnataka; 2) closure of the company’s Thakurani mine
in Orissa (see details below); and 3) a moratorium on new mining leases in Goa. Thus,
Sesa’s annual production target of 40mt by FY13 now faces some serious hurdles. The stock
has also underperformed its global mining peers by 39-57% since July. Note that the 62%-Fe
iron ore price has risen 25% during this time to a seven-month high of US$168/tonne
Cessation of mining in Orissa unlikely to affect earnings significantly
Sesa announced earlier this month that it was ceasing operations at Thakurani immediately,
citing inability to renew the mining contract on long-term “viable commercial terms”. At 2mt
capacity, the mine contributed 9% of iron ore production volumes in FY10, but the earnings
share was far lower due to higher operational costs. FY09 cost of production for Orissa was
US$58/t as compared to US$18/t for Goa. We estimate a negative EPS impact of 2% in
FY11 and 4% in both FY12 and FY13 from the mine closure.
Lowering volume and raising our realisation estimates; maintain Buy
We cut our FY11/12 volume estimates 22/30%, given the issues outlined above, and raise
realisation assumptions 5% to factor in higher iron ore prices. This reduces FY11-12F EPS
14-15%. We note that the Mines and Minerals (Development and Regulation) Act, if
implemented in its current form, could lower FY12F EPS by 21% and our equity value by
Rs61/share, although, in our view, the main profit-sharing clause could be significantly diluted
before the draft Act becomes law. We value Sesa’s iron ore business on a 5.8x peer average
FY12F EV/EBITDA ie at Rs275/share, and the 20% Cairn India stake at Rs139, arriving at a
SOTP-based target price of Rs414 (from Rs485 earlier). Buy.
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