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Supreme Court (SC) extends mining ban to Tumkur and Chitradurga districts: The
Central Empowered Committee (CEC) had found that iron ore miners
resorted to illegal mining activity in Chitradurga and Tumkur districts of
Karnataka resulting in environmental damage and loss of forest cover. As per
CEC, the level of illegal mining and the consequential environmental
degradation in these two districts were similar to that in Bellary district. Thus,
based on the CEC’s suggestions, the SC has extended the ban to Tumkur and
Chitradurga districts. These two district account for approximately 20% of
Karnataka’s iron ore production. Earlier (on July 29, 2011), the SC had
ordered a blanket ban on mining in Bellary district of Karnataka (accounts for
80% of Karnataka’s iron ore production).
Severe steel production cuts underway in the region: With extension of mining
ban in Chitradurga and Tumkur districts, iron ore production will decline
drastically in the state which will be followed up by severe cuts in steel
production in the region. Some of the plants in the region have been already
shut down while several plants are running at a lower utilisation levels on the
back of shortage of iron ore to feed their furnaces. Steel industry in the region
requires approximately 2.9mn tonnes of iron ore per month. Currently iron
ore from Karnataka is used to feed plants of companies that include JSW
Steel, Kalyani Steels, Mukand Steels, Kirloskar Ferrous, MSPL, BMM Ispat etc.
Further, several sponge iron manufacturers in Tamil Nadu and Goa also
source iron ore from Karnataka. On the supply front, NMDC’s Bellary mine is
the only major mine operating in the region; however, it is still to achieve its
targeted run-rate of 1mn tonne per month from its Bellary mines.
Auctions of piled-up inventory may provide some relief: The current iron ore
inventory at Karnataka’s mines is estimated at 25mn tonnes, which includes
~11mn tonnes of high-grade iron ore. As per JSW Steel, the SC is expected
to provide guidelines on auction of this iron ore inventory on September 02,
2011. SC has indicated that it will ensure that the required amount of ore is
released so that the steel industry does not suffer. Further, SC will look into
rehabilitation and forestation package and henceforth, permit regulated
mining in the region. This may take several months in our view.
Sesa Goa’s Chitradurga mine to be shut: Sesa Goa operates an iron ore mine
in Chitradurga district which would be shut down until further update by SC.
Our earlier estimate of production and sales volumes from Chitradurga mine
for FY2012 was 5mn tonnes (21.8% of Sesa’s total production volumes for
FY2012). With mining ban in the region, we now prune our production and
sales volume estimates for FY2012 and FY2013 as we expect no further
production from Chitradurga mines. We lower our target price to `253
(`335), valuing the stock at 3.0x FY2013 EV/EBITDA and maintain Buy rating
on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Supreme Court (SC) extends mining ban to Tumkur and Chitradurga districts: The
Central Empowered Committee (CEC) had found that iron ore miners
resorted to illegal mining activity in Chitradurga and Tumkur districts of
Karnataka resulting in environmental damage and loss of forest cover. As per
CEC, the level of illegal mining and the consequential environmental
degradation in these two districts were similar to that in Bellary district. Thus,
based on the CEC’s suggestions, the SC has extended the ban to Tumkur and
Chitradurga districts. These two district account for approximately 20% of
Karnataka’s iron ore production. Earlier (on July 29, 2011), the SC had
ordered a blanket ban on mining in Bellary district of Karnataka (accounts for
80% of Karnataka’s iron ore production).
Severe steel production cuts underway in the region: With extension of mining
ban in Chitradurga and Tumkur districts, iron ore production will decline
drastically in the state which will be followed up by severe cuts in steel
production in the region. Some of the plants in the region have been already
shut down while several plants are running at a lower utilisation levels on the
back of shortage of iron ore to feed their furnaces. Steel industry in the region
requires approximately 2.9mn tonnes of iron ore per month. Currently iron
ore from Karnataka is used to feed plants of companies that include JSW
Steel, Kalyani Steels, Mukand Steels, Kirloskar Ferrous, MSPL, BMM Ispat etc.
Further, several sponge iron manufacturers in Tamil Nadu and Goa also
source iron ore from Karnataka. On the supply front, NMDC’s Bellary mine is
the only major mine operating in the region; however, it is still to achieve its
targeted run-rate of 1mn tonne per month from its Bellary mines.
Auctions of piled-up inventory may provide some relief: The current iron ore
inventory at Karnataka’s mines is estimated at 25mn tonnes, which includes
~11mn tonnes of high-grade iron ore. As per JSW Steel, the SC is expected
to provide guidelines on auction of this iron ore inventory on September 02,
2011. SC has indicated that it will ensure that the required amount of ore is
released so that the steel industry does not suffer. Further, SC will look into
rehabilitation and forestation package and henceforth, permit regulated
mining in the region. This may take several months in our view.
Sesa Goa’s Chitradurga mine to be shut: Sesa Goa operates an iron ore mine
in Chitradurga district which would be shut down until further update by SC.
Our earlier estimate of production and sales volumes from Chitradurga mine
for FY2012 was 5mn tonnes (21.8% of Sesa’s total production volumes for
FY2012). With mining ban in the region, we now prune our production and
sales volume estimates for FY2012 and FY2013 as we expect no further
production from Chitradurga mines. We lower our target price to `253
(`335), valuing the stock at 3.0x FY2013 EV/EBITDA and maintain Buy rating
on the stock.
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