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Sesa Goa (SESA)
Metals & Mining
Slowing iron ore shipments lead to earnings miss. Sesa’s 3QFY11 EBITDA of Rs12.3
bn (+18.8% yoy) was helped by record high iron ore realization of US$86/ton which
was in line with our estimate. Net income of Rs10.7 bn (+28.7% yoy) was 10.6% lower
than our estimate. Despite record high iron ore prices, we maintain our REDUCE rating
for (1) regulatory uncertainties, (2) potential increase in export taxes, (3) potential risk to
volume assumptions and (4) imposition of mining tax that may hurt Sesa the most.
Lower-than-expected iron ore shipment leads to earnings miss
3QFY11 EBITDA of Rs12.3 bn (+18.8% yoy, +305.6% qoq) was 8.4% below our estimate of
Rs13.4 bn. Iron ore realization of US$86/ton (+59.2% yoy, 13.9% qoq) was in line with our
estimate. Discount to spot iron ore prices increased probably on account of (1) increased
proportion of sales of low-grade fines sales from Goa even though profitability is higher than other
mines and (2) potential increase in domestic sales. Iron ore EBITDA was a strong US$48/ton
(+54.3% yoy). Net income of Rs10.7 bn (+28.7 yoy, 176.7%qoq) was 10.6% below our estimate.
Iron ore shipment of 5.4 mn tons were 5.5% lower than our estimate and declined 20.8% yoy.
Note that iron ore volumes were impacted on account of (1) truckers’ strike in Goa that partly
impacted shipments, (2) continued ban of movement of iron ore from Karnataka and (3) nonrenewal
of Orissa mining lease agreement (3 mn tons annual production) after the lease expired in
end-November 2010 on account of unfavorable commercial terms.
Multiple headwinds eliminate benefit of strong iron ore prices
Even as we acknowledge the likelihood of strong iron ore prices over the next 12-18 moths, we
believe that Sesa has following material negatives to contend with, (1) likely increase in export
duty; media reports indicate that export duty may be increased to a uniform 20% from 15% on
lumps and 5% on fines presently, (2) likely negative impact from imposition of mining tax in which
Sesa may be impacted the most, (3) continued uncertainty on iron ore movement from Karnataka;
note that the Supreme Court of India has put back to mid-Feb a decision on lifting iron ore exports
from Karnataka and (4) unrelated and value-destructive acquisition, i.e. Cairn India acquisition;
total cash outflow for Sesa to acquire interest in Cairn will range from US$2.9-3.3 bn.
We will review our earnings estimates post quarterly earnings call
We may increase our current iron ore price assumption for FY2012E and FY2013E of US$126 and
US$105/ton. We will seek clarifications on (1) EC status for mine expansion program and (2) extent
of impact on volumes from truck owners’ strike in Goa. Sesa may appear inexpensive on FY2012E
financials but valuations have to viewed against the backdrop of (1) limited iron ore reserves, (2)
risks to volumes and (3) risks to profitability from regulatory changes.
Update on ban of iron ore exports by the Karnataka state government
The Karnataka state government had in July banned exports of iron ore from the state for a
period of six months with the intention to curb illegal mining and to preserve iron ore for
local use. On January 20, 2011, the Supreme Court had in its judgment given the Karnataka
government two weeks to either formulate certain rules with regard to movement of iron
ore for exports (given the six month deadline being about to lapse) or to lift its order
banning transportation of iron ore for the purpose of exports. The final decision for the
same has been pushed back to mid-February.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Sesa Goa (SESA)
Metals & Mining
Slowing iron ore shipments lead to earnings miss. Sesa’s 3QFY11 EBITDA of Rs12.3
bn (+18.8% yoy) was helped by record high iron ore realization of US$86/ton which
was in line with our estimate. Net income of Rs10.7 bn (+28.7% yoy) was 10.6% lower
than our estimate. Despite record high iron ore prices, we maintain our REDUCE rating
for (1) regulatory uncertainties, (2) potential increase in export taxes, (3) potential risk to
volume assumptions and (4) imposition of mining tax that may hurt Sesa the most.
Lower-than-expected iron ore shipment leads to earnings miss
3QFY11 EBITDA of Rs12.3 bn (+18.8% yoy, +305.6% qoq) was 8.4% below our estimate of
Rs13.4 bn. Iron ore realization of US$86/ton (+59.2% yoy, 13.9% qoq) was in line with our
estimate. Discount to spot iron ore prices increased probably on account of (1) increased
proportion of sales of low-grade fines sales from Goa even though profitability is higher than other
mines and (2) potential increase in domestic sales. Iron ore EBITDA was a strong US$48/ton
(+54.3% yoy). Net income of Rs10.7 bn (+28.7 yoy, 176.7%qoq) was 10.6% below our estimate.
Iron ore shipment of 5.4 mn tons were 5.5% lower than our estimate and declined 20.8% yoy.
Note that iron ore volumes were impacted on account of (1) truckers’ strike in Goa that partly
impacted shipments, (2) continued ban of movement of iron ore from Karnataka and (3) nonrenewal
of Orissa mining lease agreement (3 mn tons annual production) after the lease expired in
end-November 2010 on account of unfavorable commercial terms.
Multiple headwinds eliminate benefit of strong iron ore prices
Even as we acknowledge the likelihood of strong iron ore prices over the next 12-18 moths, we
believe that Sesa has following material negatives to contend with, (1) likely increase in export
duty; media reports indicate that export duty may be increased to a uniform 20% from 15% on
lumps and 5% on fines presently, (2) likely negative impact from imposition of mining tax in which
Sesa may be impacted the most, (3) continued uncertainty on iron ore movement from Karnataka;
note that the Supreme Court of India has put back to mid-Feb a decision on lifting iron ore exports
from Karnataka and (4) unrelated and value-destructive acquisition, i.e. Cairn India acquisition;
total cash outflow for Sesa to acquire interest in Cairn will range from US$2.9-3.3 bn.
We will review our earnings estimates post quarterly earnings call
We may increase our current iron ore price assumption for FY2012E and FY2013E of US$126 and
US$105/ton. We will seek clarifications on (1) EC status for mine expansion program and (2) extent
of impact on volumes from truck owners’ strike in Goa. Sesa may appear inexpensive on FY2012E
financials but valuations have to viewed against the backdrop of (1) limited iron ore reserves, (2)
risks to volumes and (3) risks to profitability from regulatory changes.
Update on ban of iron ore exports by the Karnataka state government
The Karnataka state government had in July banned exports of iron ore from the state for a
period of six months with the intention to curb illegal mining and to preserve iron ore for
local use. On January 20, 2011, the Supreme Court had in its judgment given the Karnataka
government two weeks to either formulate certain rules with regard to movement of iron
ore for exports (given the six month deadline being about to lapse) or to lift its order
banning transportation of iron ore for the purpose of exports. The final decision for the
same has been pushed back to mid-February.
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