Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Steel (JSTL)
Metals & Mining
Supreme Court ban may hurt. The Supreme Court of India has banned all mining
operations in the Bellary District of Karnataka following release of report on illegal
mining in Karnataka. JSW’s operations may be impacted (either production shutdown
or higher iron ore procurement costs) in case this ban lasts for long. We compute
impact of 2-12% on FY2012E EBITDA in various scenarios. JSW stock has corrected
sharply and may appear attractive; however, recent indictment in Lokayukta report
and impact on operations will weigh on performance.
Supreme Court bans mining activity in the Bellary region till further notice.
The Supreme Court of India banned all iron ore mining in the Bellary region of Karnataka till
further notice. Karnataka produced 45 mn tonnes of iron ore in FY2010 and 24 mn in FY2011
(reduction due to ban of exports in FY2011). Bellary region meets 65% of Karnataka’s iron ore
output of 45 mtpa. Steel production in Karnataka is around 16 mn tonnes, which presumably
requires iron ore of around 27 mn tonnes.
Impact on JSW’s FY2012E earnings under various scenarios
JSW used 12.9mn tonnes of iron ore in FY2011 to produce crude steel of 6.4 mn tonnes. JSW uses
~ 4 mn tonnes of iron ore from NMDC (through Donimalai mine in Bellary), 3 mn captive VMPL
mine (in Bellary region) and the balance from private miners in Bellary region. JSW indicated that it
has iron ore inventory of 400kt tonnes, equal to around 10 days of steel production.
Ban on mining in Bellary can also lead to spike in prices of iron ore in Chitradurga region.
Options for JSW are expensive which includes sourcing of iron ore from Goa (higher
transportation cost by at least Rs1,000/ tonne). EBITDA can get impacted by 3.9%, in case iron
ore prices go up by 10% and by 11.6% in case iron ore prices increase by 30% respectively
(assuming there would be no pass-through of the hike in iron ore prices) (refer Exhibit 1).
JSW recently indicated that it has reduced it sourcing from private miners in Bellary region to
30% from 50% earlier. JSW recently stepped up its iron ore sourcing from Chitradurga region
to 20% even though the cost of transportation is Rs200/ tonne. Impact on earnings if it sources
entire ore from Chitradurga region will likely be 3.2%. Further alternatives include Tumkur,
Shimoga and Uttar and Dakshin Kannada districts (refer Exhibit 2).
Iron ore requirements of JSW will increase to 16 mn tonnes (KIE estimate) and17 mn tonnes
(management volume guidance). JSW was relying on private miners to supply iron ore for the
3.2 mtpa expansion project. We modeled 1.4 mn tonnes of deliveries from the expansion which
may be at risk—EBITDA and EPS impact will likely be 9.7% and 18.6% (refer Exhibit 3).
NMDC’s Donimalai mine and JSW’s captive mine Vijaynagar Minerals Pvt Ltd (VMPL) are
also located in the Bellary region. JSW will have to take a hit on production in case of
extended suspension of mining activity. Note that NMDC’s mine supplies high grade fine
and lumps at attractive prices. Sourcing equivalent quantity at the right pricing will be a
challenge.
Steel production may be hit and may temporarily lead to some pricing power
Potential production impact may improve sentiments in steel market especially in the flats
segment and may temporarily lead to increase in prices. Other steel majors may benefit as a
result. We would back companies with captive source of iron mines; Tata Steel stands out in
this regard
Sesa may benefit in the near term
Sesa’s Narrain mine is located in the Chitradurga region and has environment clearance
permit to mine up to 6mtpa. Sesa recently at its earnings call indicated that net realization
(after adjustments for freight and export duty) for its fines is Karnataka is higher than export
prices. Ban on mining will help Sesa on two counts (1) achieve its volume guidance; we have
assume sales of 4.5 mn tonnes from Karnataka mine and (2) potential improvement in
realization of at least US$15-20/ tonne
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Steel (JSTL)
Metals & Mining
Supreme Court ban may hurt. The Supreme Court of India has banned all mining
operations in the Bellary District of Karnataka following release of report on illegal
mining in Karnataka. JSW’s operations may be impacted (either production shutdown
or higher iron ore procurement costs) in case this ban lasts for long. We compute
impact of 2-12% on FY2012E EBITDA in various scenarios. JSW stock has corrected
sharply and may appear attractive; however, recent indictment in Lokayukta report
and impact on operations will weigh on performance.
Supreme Court bans mining activity in the Bellary region till further notice.
The Supreme Court of India banned all iron ore mining in the Bellary region of Karnataka till
further notice. Karnataka produced 45 mn tonnes of iron ore in FY2010 and 24 mn in FY2011
(reduction due to ban of exports in FY2011). Bellary region meets 65% of Karnataka’s iron ore
output of 45 mtpa. Steel production in Karnataka is around 16 mn tonnes, which presumably
requires iron ore of around 27 mn tonnes.
Impact on JSW’s FY2012E earnings under various scenarios
JSW used 12.9mn tonnes of iron ore in FY2011 to produce crude steel of 6.4 mn tonnes. JSW uses
~ 4 mn tonnes of iron ore from NMDC (through Donimalai mine in Bellary), 3 mn captive VMPL
mine (in Bellary region) and the balance from private miners in Bellary region. JSW indicated that it
has iron ore inventory of 400kt tonnes, equal to around 10 days of steel production.
Ban on mining in Bellary can also lead to spike in prices of iron ore in Chitradurga region.
Options for JSW are expensive which includes sourcing of iron ore from Goa (higher
transportation cost by at least Rs1,000/ tonne). EBITDA can get impacted by 3.9%, in case iron
ore prices go up by 10% and by 11.6% in case iron ore prices increase by 30% respectively
(assuming there would be no pass-through of the hike in iron ore prices) (refer Exhibit 1).
JSW recently indicated that it has reduced it sourcing from private miners in Bellary region to
30% from 50% earlier. JSW recently stepped up its iron ore sourcing from Chitradurga region
to 20% even though the cost of transportation is Rs200/ tonne. Impact on earnings if it sources
entire ore from Chitradurga region will likely be 3.2%. Further alternatives include Tumkur,
Shimoga and Uttar and Dakshin Kannada districts (refer Exhibit 2).
Iron ore requirements of JSW will increase to 16 mn tonnes (KIE estimate) and17 mn tonnes
(management volume guidance). JSW was relying on private miners to supply iron ore for the
3.2 mtpa expansion project. We modeled 1.4 mn tonnes of deliveries from the expansion which
may be at risk—EBITDA and EPS impact will likely be 9.7% and 18.6% (refer Exhibit 3).
NMDC’s Donimalai mine and JSW’s captive mine Vijaynagar Minerals Pvt Ltd (VMPL) are
also located in the Bellary region. JSW will have to take a hit on production in case of
extended suspension of mining activity. Note that NMDC’s mine supplies high grade fine
and lumps at attractive prices. Sourcing equivalent quantity at the right pricing will be a
challenge.
Steel production may be hit and may temporarily lead to some pricing power
Potential production impact may improve sentiments in steel market especially in the flats
segment and may temporarily lead to increase in prices. Other steel majors may benefit as a
result. We would back companies with captive source of iron mines; Tata Steel stands out in
this regard
Sesa may benefit in the near term
Sesa’s Narrain mine is located in the Chitradurga region and has environment clearance
permit to mine up to 6mtpa. Sesa recently at its earnings call indicated that net realization
(after adjustments for freight and export duty) for its fines is Karnataka is higher than export
prices. Ban on mining will help Sesa on two counts (1) achieve its volume guidance; we have
assume sales of 4.5 mn tonnes from Karnataka mine and (2) potential improvement in
realization of at least US$15-20/ tonne
No comments:
Post a Comment