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UBS Investment Research
India Metals & Mining
K arnataka Mining ban – Round II
Event: Supreme Court (SC) bans mining in Chitradurga/Tumkur regions
SC has extended the mining ban to Chitradurga and Tumkur districts (apart from
Bellary) based on CEC’s report on environmental damage. We estimate these 2
regions together account for c10-12 mt of production. Though CEC had
recommended sale of 25mt inventory held by the miners, the SC has not allowed it.
Impact: -ve for Sesa Goa, JSW; no impact on NMDC
1) Sesa has 6mt capacity in Chittradurga and this ban could in the worst case
(assuming it’s not lifted) impact FY13E PAT by 30%. 2) JSW is currently
procuring c50% of its iron ore needs from Chittradurga/Tumkur. a) If mining ban
is not lifted, JSW will have to buy from Goa/Chattisgarh which would mean
cUS$35-40/t of additional logistics cost impacting EBITDA by cUS$60-70/t
(JSW’s EBITDA/t for Q1FY12/FY12E was/is US$180/US$137). However, this
will be partially offset by increase in steel prices (as 25% of Indian steel production
to be impacted) 2) Even if SC allows sale of the 25mt iron ore inventory in its next
hearing we believe JSW’s production is likely to get impacted by a month. NMDC
is positively impacted by the ban.
Our View
We believe (after speaking to couple of iron ore traders) that in its Sep 2 hearing,
the Supreme Court might allow the sale of 25mt inventory to the steel mills in the
region. We also believe the SC will take a more practical approach on the blanket
mining ban given its impact on the steel industry and employment. Media reports
indicate there could be violation of norms (environmental/wildlife) by mines in
Goa as well. We are revisiting our estimate for Sesa & JSW.
Impact on Sesa Goa
Sesa Goa has a production target of c6 mt/c10 mt from Chittradurga and
Tumkur regions for FY12/13.
We estimate Sesa Goa has already sold c1.5mt of iron ore from the region in
Q1/Q2 FY12 put together. Additionally it is sitting on an inventory of c2mt in
the region, which we think the SC will allow to be sold to the steel mills in its
Sept. 2 hearing.
To that extent, even assuming the ban is not lifted in 3 months from now, when
the SC reviews the situation after the state government/ICFRE submit their
reports, Sesa will do a volume of c3.5 mt from Karnataka for FY12, while FY13
will be nil.
However, we believe it is very unlikely the blanket ban will continue forever.
We expect all legal mining will be allowed in the region eventually. In fact, in
its Bellary mining ban hearing (as per media reports) the bench of SC judges had
clarified that it is only suspending the mining lease and will work out a solution
after 3 months when the environmental damage impact assessment/rehabilitation
reports are submitted. Sesa had clarified in its Q1FY12 results call that it
conforms to all norms in the region and operates within the lease boundaries.
In the worst case, assuming a) no volumes from Karnataka b) higher royalty at
20% (based on proposal in draft mining bill approved by the GoM) and c) no
increase in domestic iron prices, our valuation could decline to Rs270/share.
Additionally, as per media reports, concerns of environmental damage are also
being heard in relation to mines in Goa. In a recent case, the Bombay High
Court has ruled that environmental clearance obtained under 1994 EIA is valid
only for 5 years and fresh environmental clearances have to be sought from the
environmental ministry. There are 54 mines in Goa that fall under this category.
In another development, in response to a petition filed by Goa Foundation, the
court ordered suspension of mining at 14 mines which did not have valid
consents under the Air and Water Pollution Control Acts. In yet another
development, Goa Foundation challenged grant of wildlife clearances to several
mines issued by the Chief Wildlife Warden. The Goa Foundation contends these
clearances disregarded an order of the Supreme Court which required mining
leases with environment clearances to procure prior approval from the Standing
Committee of the National Board of Wildlife.
We are revisiting our estimates for Sesa Goa.
Impact on JSW Steel
After the SC had banned mining in Bellary, JSW was procuring c50% of its
requirements from Chittradurga & Tumkur.
a) If mining ban is not lifted, JSW will now have to procure from
Goa/Chattisgarh which would mean cUS$35-40/t of additional logistics
cost impacting EBITDA by cUS$60-70/t (JSW’s EBITDA/t for
Q1FY12 was US$180, UBS FY12E for the same is US$137).
However, we believe steel prices would also increase in this scenario as
~15mt of steel production will be impacted (c25% of Indian steel
production) thereby reducing the per tonne impact on EBITDA.
b) Even if the SC allows sale of the 25mt iron ore inventory in its next
hearing we believe 1) JSW’s production might get impacted by a month.
2) EBITDA/t is likely to be impacted as iron ore prices are likely to rise
structurally (though a part of it may be passed on).
Additionally, we believe SC will come up with a more practical solution to the
issue of mining in the region balancing the interests of the steel mills, the end
consumers dependent on these mills and the impact on environment.
We are revisiting our estimates for JSW Steel.
Impact on NMDC
The Karnataka mining ban is incrementally positive for NMDC, as a) it has been
exempted from the ban and is allowed to produce @rate of 12 mtpa as against its
actual capacity/production target of 6mtpa b) the ban induced shortage will push
the domestic iron ore prices higher.
However, even at the current stock price NMDC is one of the most expensive
iron ore miners globally.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Metals & Mining
K arnataka Mining ban – Round II
Event: Supreme Court (SC) bans mining in Chitradurga/Tumkur regions
SC has extended the mining ban to Chitradurga and Tumkur districts (apart from
Bellary) based on CEC’s report on environmental damage. We estimate these 2
regions together account for c10-12 mt of production. Though CEC had
recommended sale of 25mt inventory held by the miners, the SC has not allowed it.
Impact: -ve for Sesa Goa, JSW; no impact on NMDC
1) Sesa has 6mt capacity in Chittradurga and this ban could in the worst case
(assuming it’s not lifted) impact FY13E PAT by 30%. 2) JSW is currently
procuring c50% of its iron ore needs from Chittradurga/Tumkur. a) If mining ban
is not lifted, JSW will have to buy from Goa/Chattisgarh which would mean
cUS$35-40/t of additional logistics cost impacting EBITDA by cUS$60-70/t
(JSW’s EBITDA/t for Q1FY12/FY12E was/is US$180/US$137). However, this
will be partially offset by increase in steel prices (as 25% of Indian steel production
to be impacted) 2) Even if SC allows sale of the 25mt iron ore inventory in its next
hearing we believe JSW’s production is likely to get impacted by a month. NMDC
is positively impacted by the ban.
Our View
We believe (after speaking to couple of iron ore traders) that in its Sep 2 hearing,
the Supreme Court might allow the sale of 25mt inventory to the steel mills in the
region. We also believe the SC will take a more practical approach on the blanket
mining ban given its impact on the steel industry and employment. Media reports
indicate there could be violation of norms (environmental/wildlife) by mines in
Goa as well. We are revisiting our estimate for Sesa & JSW.
Impact on Sesa Goa
Sesa Goa has a production target of c6 mt/c10 mt from Chittradurga and
Tumkur regions for FY12/13.
We estimate Sesa Goa has already sold c1.5mt of iron ore from the region in
Q1/Q2 FY12 put together. Additionally it is sitting on an inventory of c2mt in
the region, which we think the SC will allow to be sold to the steel mills in its
Sept. 2 hearing.
To that extent, even assuming the ban is not lifted in 3 months from now, when
the SC reviews the situation after the state government/ICFRE submit their
reports, Sesa will do a volume of c3.5 mt from Karnataka for FY12, while FY13
will be nil.
However, we believe it is very unlikely the blanket ban will continue forever.
We expect all legal mining will be allowed in the region eventually. In fact, in
its Bellary mining ban hearing (as per media reports) the bench of SC judges had
clarified that it is only suspending the mining lease and will work out a solution
after 3 months when the environmental damage impact assessment/rehabilitation
reports are submitted. Sesa had clarified in its Q1FY12 results call that it
conforms to all norms in the region and operates within the lease boundaries.
In the worst case, assuming a) no volumes from Karnataka b) higher royalty at
20% (based on proposal in draft mining bill approved by the GoM) and c) no
increase in domestic iron prices, our valuation could decline to Rs270/share.
Additionally, as per media reports, concerns of environmental damage are also
being heard in relation to mines in Goa. In a recent case, the Bombay High
Court has ruled that environmental clearance obtained under 1994 EIA is valid
only for 5 years and fresh environmental clearances have to be sought from the
environmental ministry. There are 54 mines in Goa that fall under this category.
In another development, in response to a petition filed by Goa Foundation, the
court ordered suspension of mining at 14 mines which did not have valid
consents under the Air and Water Pollution Control Acts. In yet another
development, Goa Foundation challenged grant of wildlife clearances to several
mines issued by the Chief Wildlife Warden. The Goa Foundation contends these
clearances disregarded an order of the Supreme Court which required mining
leases with environment clearances to procure prior approval from the Standing
Committee of the National Board of Wildlife.
We are revisiting our estimates for Sesa Goa.
Impact on JSW Steel
After the SC had banned mining in Bellary, JSW was procuring c50% of its
requirements from Chittradurga & Tumkur.
a) If mining ban is not lifted, JSW will now have to procure from
Goa/Chattisgarh which would mean cUS$35-40/t of additional logistics
cost impacting EBITDA by cUS$60-70/t (JSW’s EBITDA/t for
Q1FY12 was US$180, UBS FY12E for the same is US$137).
However, we believe steel prices would also increase in this scenario as
~15mt of steel production will be impacted (c25% of Indian steel
production) thereby reducing the per tonne impact on EBITDA.
b) Even if the SC allows sale of the 25mt iron ore inventory in its next
hearing we believe 1) JSW’s production might get impacted by a month.
2) EBITDA/t is likely to be impacted as iron ore prices are likely to rise
structurally (though a part of it may be passed on).
Additionally, we believe SC will come up with a more practical solution to the
issue of mining in the region balancing the interests of the steel mills, the end
consumers dependent on these mills and the impact on environment.
We are revisiting our estimates for JSW Steel.
Impact on NMDC
The Karnataka mining ban is incrementally positive for NMDC, as a) it has been
exempted from the ban and is allowed to produce @rate of 12 mtpa as against its
actual capacity/production target of 6mtpa b) the ban induced shortage will push
the domestic iron ore prices higher.
However, even at the current stock price NMDC is one of the most expensive
iron ore miners globally.
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