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India Equity Research Reports, IPO and Stock News
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Negatives factored in
Sesa Goa has the most sustainable iron ore mining business in India. Its Goa
mines account for 80% of its 20-21m tons annual iron ore production and its
Karnataka mines, which contribute the remaining 20% production are located
~300km from ports.
Goa has the advantage of proximity to ports. Iron ore is transported 10-20km by
trucks from mines to nearby rivers and loaded onto barges, which in turn move
similar distances though the rivers into deep sea. With the help of transships, the
iron ore is loaded from barges into outgoing large capesize vessels for export.
Total logistics costs range from US$7-8/ton after factoring recent hikes in road
transport cost due to recently imposed weight and time restrictions.
Iron ore from Goa mines is of lower grade, with 52-62% Fe content. Though
realizations are lower, margins are similar to high grade ore due to low cost of
mining and logistics. Due to its inferior grade and fragility, Indian steel producers
find it undesirable. Hence, there is little risk of export ban. Iron ore exports from
Goa have sustained through multiple economic and steel cycles due to low costs.
Sesa Goa has permission to mine ~16mtpa in Goa, which it plans to ramp up to
30mtpa. Though it has already developed the infrastructure, the statutory
permissions are still awaited.
The Karnataka mines yield superior grade ore and costs are also low. Indian
Railways charges higher freights for carrying iron ore meant for exports. Despite
higher logistics costs, margins from the Karnataka business remain healthy.
Exports have temporarily been banned due to problems related to illegal mining
by few miners in the region and lack of effective administration. The Supreme
Court is, in principal, in favor of exports and has asked the state government to
put in place effective administration so that interests of genuine mining companies
are not hurt. A final word on this issue is expected in the first week of April 2011.
Sesa has permission to mine ~6mtpa against the current production rate of 3mtpa.
Production can be ramped up to 10mtpa once statutory permissions are in place.
Cost of mining has been continuously reduced since Sesa was acquired by Vedanta.
Under the new leadership, management processes have been streamlined to
enhance productivity.
Cash surpluses have mounted every year due to strong cash flows. Though RoIC
remains attractive at over 90%, RoE has continuously declined due to low return
on liquid investment. Sesa has been continuously on the lookout for inorganic
growth, but has kept away due to rising valuations. Dempo was an attractive and
thoughtful acquisition.
Vedanta's move to acquire Cairn using cash surpluses of Sesa for 20% stake has
de-rated the stock despite EPS accretion.
The stock has been de-rated due to uncertainties relating to the Cairn deal,
Karnataka export ban, and downgrading of volume guidance due to delay in getting
statutory permissions. Despite all-time high iron ore prices, the stock performance
has been subdued. We believe most of the negatives are already factored. The
stock is now trading at attractive valuations of 7.6x FY12E EPS, and an EV of 3x
FY12E EBITDA and US$8.3/ton. Our discounted cash flow valuation is Rs249-458/
share, assuming iron ore prices range from US$100/dmt to US$160/dmt on fob basis
over the next 10-12 years. Though iron prices may soften from current levels, they will
still remain very attractive and well above US$100/dmt. Risk to reward ratio has turned
favorable. Maintain Buy.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Negatives factored in
Sesa Goa has the most sustainable iron ore mining business in India. Its Goa
mines account for 80% of its 20-21m tons annual iron ore production and its
Karnataka mines, which contribute the remaining 20% production are located
~300km from ports.
Goa has the advantage of proximity to ports. Iron ore is transported 10-20km by
trucks from mines to nearby rivers and loaded onto barges, which in turn move
similar distances though the rivers into deep sea. With the help of transships, the
iron ore is loaded from barges into outgoing large capesize vessels for export.
Total logistics costs range from US$7-8/ton after factoring recent hikes in road
transport cost due to recently imposed weight and time restrictions.
Iron ore from Goa mines is of lower grade, with 52-62% Fe content. Though
realizations are lower, margins are similar to high grade ore due to low cost of
mining and logistics. Due to its inferior grade and fragility, Indian steel producers
find it undesirable. Hence, there is little risk of export ban. Iron ore exports from
Goa have sustained through multiple economic and steel cycles due to low costs.
Sesa Goa has permission to mine ~16mtpa in Goa, which it plans to ramp up to
30mtpa. Though it has already developed the infrastructure, the statutory
permissions are still awaited.
The Karnataka mines yield superior grade ore and costs are also low. Indian
Railways charges higher freights for carrying iron ore meant for exports. Despite
higher logistics costs, margins from the Karnataka business remain healthy.
Exports have temporarily been banned due to problems related to illegal mining
by few miners in the region and lack of effective administration. The Supreme
Court is, in principal, in favor of exports and has asked the state government to
put in place effective administration so that interests of genuine mining companies
are not hurt. A final word on this issue is expected in the first week of April 2011.
Sesa has permission to mine ~6mtpa against the current production rate of 3mtpa.
Production can be ramped up to 10mtpa once statutory permissions are in place.
Cost of mining has been continuously reduced since Sesa was acquired by Vedanta.
Under the new leadership, management processes have been streamlined to
enhance productivity.
Cash surpluses have mounted every year due to strong cash flows. Though RoIC
remains attractive at over 90%, RoE has continuously declined due to low return
on liquid investment. Sesa has been continuously on the lookout for inorganic
growth, but has kept away due to rising valuations. Dempo was an attractive and
thoughtful acquisition.
Vedanta's move to acquire Cairn using cash surpluses of Sesa for 20% stake has
de-rated the stock despite EPS accretion.
The stock has been de-rated due to uncertainties relating to the Cairn deal,
Karnataka export ban, and downgrading of volume guidance due to delay in getting
statutory permissions. Despite all-time high iron ore prices, the stock performance
has been subdued. We believe most of the negatives are already factored. The
stock is now trading at attractive valuations of 7.6x FY12E EPS, and an EV of 3x
FY12E EBITDA and US$8.3/ton. Our discounted cash flow valuation is Rs249-458/
share, assuming iron ore prices range from US$100/dmt to US$160/dmt on fob basis
over the next 10-12 years. Though iron prices may soften from current levels, they will
still remain very attractive and well above US$100/dmt. Risk to reward ratio has turned
favorable. Maintain Buy.
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