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UBS Investment Research
Jindal Saw
Iron ore mine lease agreement positive
„ JSL signs iron ore mine lease agreement with State of Rajasthan
JSL announces signing Mining Lease Agreement for iron ore mine in Bhilwara.
Initial iron ore probable reserve estimate is ~180 mn tonnes. Fe grade is ~45% and
company plans to put up a benefication plan to improve Fe content to 66%. JSL
also plans pellet plant (final decision in 4-6 weeks). Capex likely of Rs 3.0-3.2 bn.
„ Mine operations by Sept-2011; management indicates Rs 3-6 bn EBITDA
JSL expects the mine/ benefication plant to start by Sept 2011 and pellet plant by
March 2012. JSL indicated concentrate production of ~0.8 mn MT in Year 1 and
~1.7 mn MT production thereon. ~0.6-0.8 mn MT of ore concentrate is to be used
internally for DI pipes and rest to be sold as pellets externally. JSL guides saving
of Rs 3,000-3,500/MT on ore, and EBITDA impact of Rs 3-6 bn FY13E onwards.
„ Revise FY13 EPS by 17.6%; new orders likely, stock to gradually re-rate
We assume benefit of Rs 3,500/MT and lower ore concentrate volumes of 0.6 mn
MT in FY13. JSL mentioned likely large new orders, potentially taking order book
to Rs 50 bn. We expect the stock to re-rate on mine development, favourable order
inflows, new DI capacity commissioning, and meaningful contribution from Jindal
ITF. Consensus may not be building in significant impact from mine/Jindal ITF.
„ Valuation: Evolving well; maintain Buy, upgrade PT to Rs 305/share
JSL business is evolving favourably (that explains premium valuations to peers).
We re-iterate Buy rating and upgrade PT to Rs 305/share. Recent stock correction
is a buying opportunity. Key risks are MTM of ~US$ 132 mn on derivatives
(potential reduction in net worth after IFRS adoption).
JSL signs mine lease agreement (iron ore)
Event: JSL today announced the execution of Mining Lease Agreement with the
State of Rajasthan for iron ore mine in Bhilwara.
Mine details: Lease period is ~30 years and total lease area is 1,557 hectares.
Initial probable reserve estimates (based on geological survey of India) is ~180
mn tonnes of ore.
Iron ore grade: Fe content or grade is ~45% and company plans to put up a
benefication plan to improve Fe content to 66%.
Timelines and capex: Management expects the mine and benefication plant (~
2 mn MT capacity) should start by Sept 2011 and the pellet plant (~1.2 mn MT
capacity) by March 2012. JSL bought major equipment for the beneficiation
plant from Minnesota, US, three years ago. Hence, the lead time is not long for
starting the plant. Please note that management will firm up the decision on the
pellet plant in the next 4-6 weeks. Capital investment in both is estimated at ~Rs
3.0-3.2 bn.
Monetisation of iron ore mined: Further, company indicated Fe ore
concentrate production of ~0.8 mn MT in first year of production and
subsequently, ramp up to ~1.7 mn MT. Total ore to be mined is estimated at
~4.3 mn MT from year 2 onwards. Theoretically, this indicates total mined ore
at ~127 mn MT over 30 years. Half of the production of ore concentrate (~0.6-
0.8 mn MT) is expected to be used for the captive requirement for
manufacturing DI pipes and remaining is likely to be sold as pellets to other
customers externally. Selling of iron ore is unlikely to be appreciated by the
government and value addition is required.
Impact on financials: While management has not shared details on extraction,
crushing and other costs, they indicated that this should result in EBITDA
benefit of ~Rs 3,000-3,500/MT for ore concentrate produced. They also
indicated benefit of Rs 3 bn in year 1 of mining (full year of operations) and ~Rs
6 bn year 2 onwards. JSL’s current landed cost of iron ore is ~Rs 6,800/MT.
From this we estimate the implicit captive cost of ore at ~Rs 3,000-3,500/MT.
However, company did indicate benefication cost of Rs 300-500/MT
Management expects order book to improve
JSL management has also indicated that activity in the pipes market is
favourable and company is expecting some favourable orders, going forward.
They expect their order book to touch ~Rs 50 bn or US$ 1.3 bn from ~US$ 780
mn at Q2FY11 end. Management also reiterated that Jindal ITF business was
improving with new projects in Jindal Water Infrastructure and waste to energy
plant in Jalander. Management guided Jindal ITF to contribute Rs 12 bn sales in
FY12E. Current gross debt is ~Rs 5.5 bn and cash is Rs 1 bn.
We are revising our EPS estimate upwards by 17.6% to Rs 26.4/share in FY13E,
to incorporate the impact of the signing of mine lease agreement and mining of
iron ore. Earlier, we had not assumed any impact from the iron ore mine. We are
conservatively assuming saving of raw material costs at Rs 3,500/MT and ore
concentrate volumes of 0.6 mn MT. Further, we have also included the capex of
Rs 3.0 bn for these 2 projects in our estimates. Going forward, we assume only 1
mn MT of ore concentrate, as we await to see the company scale up its mining
operations and sell pellets externally. Incorporating the impact of the mine, we
arrive at an SOTP valuation of Rs 305/share based on a DCF value of Rs
252/share on the core business and assuming ~Rs 53/share from the value of
investments (using market value at a 50% holding company discount).
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