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Better iron-ore outlook
CLSA has upgraded CY11-15 iron-ore price forecasts by 12-30% based on
strong demand in China/OECD countries and a weaker supply outlook. This
results in a sharp 45-56% upgrade to our FY12-13 EPS estimates for Sesa
Goa. Sesa’s FY12 volume growth will be strong as the Karnataka export ban
has been lifted. However, volume growth post FY12 will require mining
clearances, which continue to see delays. Our new target price of Rs270 gives
Sesa the benefit of doubt on mining approvals and reserve accretion. We
remain negative but upgrade Sesa one notch to U-PF from SELL.
Large iron-ore price upgrade results in ~50% increase in FY12-13 EPS
CLSA’s commodities strategist - Ian Roper - has upgraded CY11-15 iron-ore price
forecasts by 12-30% which has resulted in ~50% increase to our FY12-13 EPS
estimates for Sesa Goa. We now expect iron-ore prices to average US$165/t and
US$140/t in CY11 and CY12 respectively, compared to the earlier forecast of
US$147/t and US$110/t respectively. The iron-ore price upgrade is based on – 1)
stronger than expected steel demand in China and OECD countries, and 2)
continued delays in commissioning of new iron-ore projects leading to weaker
supply outlook. In China, social housing is likely to provide a boost to steel
consumption even as stimulus spending fades. Ian also believes that China’s steel
production in CY10 was underreported by 20mt, which implies that a 700mt
production rate in China for CY11 is sustainable. However, Ian’s bearish view on
longer-term iron-ore prices remains unchanged as sustained higher prices are
expected to trigger significant investment in new projects, strengthening the
expectations of oversupply later in the decade.
FY12 volumes will be strong but need clearances for growth post FY12
Sesa is likely to achieve its 15-20% volume growth target for FY12 as the export
ban in Karnataka has been lifted and it is carrying 2mt of inventory in the state.
However, Sesa’s current level of mining clearances is sufficient to produce only
23mtpa and further clearances are essential to increase mining output beyond
FY12. This remains a concern since Sesa has been seeing a lot of delays here.
Our TP gives Sesa the benefit of doubt on approvals & reserve accretion
Our revised NPV-based target price of Rs270/sh is by no means conservative
since it assumes that – 1) approvals will eventually come through for higher
mining output, and 2) Sesa will add a further 160mt to reserves at zero cost. We
believe that iron ore prices need to average US$150/t over the next four years to
justify any upside to Sesa’s current stock price. We use CLSA’s target price of
Rs395 to value the Cairn India stake. We remain negative on Sesa but upgrade
our rating one notch to U-PF given limited downside.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Better iron-ore outlook
CLSA has upgraded CY11-15 iron-ore price forecasts by 12-30% based on
strong demand in China/OECD countries and a weaker supply outlook. This
results in a sharp 45-56% upgrade to our FY12-13 EPS estimates for Sesa
Goa. Sesa’s FY12 volume growth will be strong as the Karnataka export ban
has been lifted. However, volume growth post FY12 will require mining
clearances, which continue to see delays. Our new target price of Rs270 gives
Sesa the benefit of doubt on mining approvals and reserve accretion. We
remain negative but upgrade Sesa one notch to U-PF from SELL.
Large iron-ore price upgrade results in ~50% increase in FY12-13 EPS
CLSA’s commodities strategist - Ian Roper - has upgraded CY11-15 iron-ore price
forecasts by 12-30% which has resulted in ~50% increase to our FY12-13 EPS
estimates for Sesa Goa. We now expect iron-ore prices to average US$165/t and
US$140/t in CY11 and CY12 respectively, compared to the earlier forecast of
US$147/t and US$110/t respectively. The iron-ore price upgrade is based on – 1)
stronger than expected steel demand in China and OECD countries, and 2)
continued delays in commissioning of new iron-ore projects leading to weaker
supply outlook. In China, social housing is likely to provide a boost to steel
consumption even as stimulus spending fades. Ian also believes that China’s steel
production in CY10 was underreported by 20mt, which implies that a 700mt
production rate in China for CY11 is sustainable. However, Ian’s bearish view on
longer-term iron-ore prices remains unchanged as sustained higher prices are
expected to trigger significant investment in new projects, strengthening the
expectations of oversupply later in the decade.
FY12 volumes will be strong but need clearances for growth post FY12
Sesa is likely to achieve its 15-20% volume growth target for FY12 as the export
ban in Karnataka has been lifted and it is carrying 2mt of inventory in the state.
However, Sesa’s current level of mining clearances is sufficient to produce only
23mtpa and further clearances are essential to increase mining output beyond
FY12. This remains a concern since Sesa has been seeing a lot of delays here.
Our TP gives Sesa the benefit of doubt on approvals & reserve accretion
Our revised NPV-based target price of Rs270/sh is by no means conservative
since it assumes that – 1) approvals will eventually come through for higher
mining output, and 2) Sesa will add a further 160mt to reserves at zero cost. We
believe that iron ore prices need to average US$150/t over the next four years to
justify any upside to Sesa’s current stock price. We use CLSA’s target price of
Rs395 to value the Cairn India stake. We remain negative on Sesa but upgrade
our rating one notch to U-PF given limited downside.
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