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Sesa Goa (SESA)
Metals & Mining
Constrained by regulatory hurdles. Day 4 of the India field visit organized by
Vedanta comprised of a visit to Sesa Goa’s Sonshi mine followed by management
interactions. Field visit and interactions with the management lent a lot of comfort
regarding execution, pace of logistics development and potential upgrade to reserves
and resources. However, regulatory hurdles and the impending MMDR bill underpins
our Cautious stance despite seemingly inexpensive valuations. REDUCE.
Gearing up for capacity expansion
Sesa is continuing with its investment program to increase iron ore capacity to 40 mn tonnes by
end-FY2013E. Sesa recently commissioned an additional railway siding in Karnataka. In addition, it
is investing in a private road corridor up to the Karnataka highway, which the management
expects to complete by 4QFY12. Sesa is working with the Goa mining industry to convert some of
the roads to three lanes from one lane currently. It is also working to develop a private road
corridor in South Goa. Sesa has placed orders for 17 barges and investing in another transhipper
to increase transport capacity. We are impressed with the progress so far.
Confident of increase in reserves and resources
Sesa is confident of a significant increase in reserves and resources. At its recent earnings call, Sesa
indicated that it would end FY2011E with R&R of at least 275 mn tonnes, implying an upgrade of at
least 20 mn tonnes. Note that our fair value is based on R&R upgrade of 80 mn tonnes.
Expansion plans uncertain and subject to EC clearance
Sesa reiterated its target of 40 mn tonnes of iron ore capacity (22 mn tonnes currently) by end-
FY2013E—30 mn tonnes from Goa mines and 10 mn from Karnataka mine. A public hearing for
the Karnataka mine was completed recently; this will be followed by FC clearance. Sesa expects all
approvals for Karnataka mine by FY2012E. Approval for the Goa mine expansion is unlikely any
time soon, since the State Government of Goa is unlikely to take up new requests for mining
expansion till new MMDR rules are finalized.
Maintain REDUCE rating with TP of Rs275
We continue to have a positive outlook on iron ore prices, though we believe that regulatory
action to curb exports will act as a significant headwind. In addition, potential changes in the
MMDR Act that may call for sharing of 26% of profits generated, which would be an additional
negative. Our fair value of Rs275 comprises of Rs139 for core business and Rs135 for proposed a
20% stake in Cairn India. Our core business value is based on long-term iron ore price of
US$85/dmt and 80 mn ton accretion to iron ore reserves. Maintain our REDUCE rating.
Other takeaways
Realization discount relative to benchmark FOB price may widen on (1) domestic
realization has been flattish for Jan and Feb 2011 despite significant increase in
international iron ore prices, and (2) further decline in high realization Orissa mines.
Sonshi mine has environment clearance of 5 mn tonnes (ROM). The company has applied
for an increase in capacity to 10 mn tonnes, which we suspect will involve the acquisition
of private land. The average grade of ore at Sonshi is 57% Fe.
Transportation of ore from Goa mines has increased by 25% in the months of Jan and
Feb 2011 from Dec 2010 levels.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sesa Goa (SESA)
Metals & Mining
Constrained by regulatory hurdles. Day 4 of the India field visit organized by
Vedanta comprised of a visit to Sesa Goa’s Sonshi mine followed by management
interactions. Field visit and interactions with the management lent a lot of comfort
regarding execution, pace of logistics development and potential upgrade to reserves
and resources. However, regulatory hurdles and the impending MMDR bill underpins
our Cautious stance despite seemingly inexpensive valuations. REDUCE.
Gearing up for capacity expansion
Sesa is continuing with its investment program to increase iron ore capacity to 40 mn tonnes by
end-FY2013E. Sesa recently commissioned an additional railway siding in Karnataka. In addition, it
is investing in a private road corridor up to the Karnataka highway, which the management
expects to complete by 4QFY12. Sesa is working with the Goa mining industry to convert some of
the roads to three lanes from one lane currently. It is also working to develop a private road
corridor in South Goa. Sesa has placed orders for 17 barges and investing in another transhipper
to increase transport capacity. We are impressed with the progress so far.
Confident of increase in reserves and resources
Sesa is confident of a significant increase in reserves and resources. At its recent earnings call, Sesa
indicated that it would end FY2011E with R&R of at least 275 mn tonnes, implying an upgrade of at
least 20 mn tonnes. Note that our fair value is based on R&R upgrade of 80 mn tonnes.
Expansion plans uncertain and subject to EC clearance
Sesa reiterated its target of 40 mn tonnes of iron ore capacity (22 mn tonnes currently) by end-
FY2013E—30 mn tonnes from Goa mines and 10 mn from Karnataka mine. A public hearing for
the Karnataka mine was completed recently; this will be followed by FC clearance. Sesa expects all
approvals for Karnataka mine by FY2012E. Approval for the Goa mine expansion is unlikely any
time soon, since the State Government of Goa is unlikely to take up new requests for mining
expansion till new MMDR rules are finalized.
Maintain REDUCE rating with TP of Rs275
We continue to have a positive outlook on iron ore prices, though we believe that regulatory
action to curb exports will act as a significant headwind. In addition, potential changes in the
MMDR Act that may call for sharing of 26% of profits generated, which would be an additional
negative. Our fair value of Rs275 comprises of Rs139 for core business and Rs135 for proposed a
20% stake in Cairn India. Our core business value is based on long-term iron ore price of
US$85/dmt and 80 mn ton accretion to iron ore reserves. Maintain our REDUCE rating.
Other takeaways
Realization discount relative to benchmark FOB price may widen on (1) domestic
realization has been flattish for Jan and Feb 2011 despite significant increase in
international iron ore prices, and (2) further decline in high realization Orissa mines.
Sonshi mine has environment clearance of 5 mn tonnes (ROM). The company has applied
for an increase in capacity to 10 mn tonnes, which we suspect will involve the acquisition
of private land. The average grade of ore at Sonshi is 57% Fe.
Transportation of ore from Goa mines has increased by 25% in the months of Jan and
Feb 2011 from Dec 2010 levels.
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