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JSW Steel (JSTL)
Metals & Mining
Impact on production likely. The Supreme Court has provided for monthly release of
1.5 mn tonnes of iron ore via the e-auction route after the CEC works out the sale and
transportation modalities within the next 7-10 days. JSW’s iron ore sourcing will likely
reduce in the interim and the company may take a hit on production. Iron ore sourcing
costs will also increase once e-auction starts. We retain our REDUCE rating with an
unchanged target price of Rs660. We have made marginal changes to our estimates
Sale of iron ore inventory via e-auction route @1.5 mn tonnes per month
The Supreme Court will allow sale of iron ore inventory lying at the mines in Karnataka once the
CEC and Attorney General submit a detailed report within the next 7-10 days on the modalities of
sale. Our understanding of the development is as follows:
After evaluating the requirements of all steel and associate steel industries, the Supreme Court
has allowed for 1.5 mn tonnes p.m. of iron ore to be released from the stockpile of inventory.
This will be sold via the e-auction route conducted by the MSTC with the base price dependant
on the current pricing mechanism followed by NMDC. Given the shortage of iron ore,
competitive bidding with lead to increase in iron ore prices. Sale of iron ore inventory is not
mandatory for the miner.
Only end-user industries can participate in this e-auction. Pellet producers are allowed to
participate provided they eventually sell the pellets in the domestic market. Moreover, no iron
ore can be purchased through this route for the purpose of stocking.
Further cost pressures, possible further slowdown in production
JSW had only 7 days of iron ore inventory when the mining ban was extended to the Chitradurga
and Tumkur region a week ago. JSW’s production will be impacted since the e-auction of iron ore
stockpile in Karnataka may take at least 10-15 days. JSW was sourcing 35-40% of its daily iron
requirements from the Chitradurga and Tumkur region. JSW may struggle to operate at its
previously stated 80% capacity utilization level (8.5 mn tonnes of production target will not be
achieved).
In addition, iron ore sourcing costs will also increase from the management-guided levels of
Rs3,200/tonne. One positive for the company is that the inventory lying unsold is made up majorly
of fines (70% fines) which could be utilized by only a few steelmakers besides JSW. We broadly
retain our estimates. We had already built in a potential impact on production though iron ore
sourcing costs may be higher than our estimates. A US$5/tonne increase in iron ore costs impacts
our FY2012E EBITDA and EPS estimates by 3.8% and 8.2%, respectively
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Steel (JSTL)
Metals & Mining
Impact on production likely. The Supreme Court has provided for monthly release of
1.5 mn tonnes of iron ore via the e-auction route after the CEC works out the sale and
transportation modalities within the next 7-10 days. JSW’s iron ore sourcing will likely
reduce in the interim and the company may take a hit on production. Iron ore sourcing
costs will also increase once e-auction starts. We retain our REDUCE rating with an
unchanged target price of Rs660. We have made marginal changes to our estimates
Sale of iron ore inventory via e-auction route @1.5 mn tonnes per month
The Supreme Court will allow sale of iron ore inventory lying at the mines in Karnataka once the
CEC and Attorney General submit a detailed report within the next 7-10 days on the modalities of
sale. Our understanding of the development is as follows:
After evaluating the requirements of all steel and associate steel industries, the Supreme Court
has allowed for 1.5 mn tonnes p.m. of iron ore to be released from the stockpile of inventory.
This will be sold via the e-auction route conducted by the MSTC with the base price dependant
on the current pricing mechanism followed by NMDC. Given the shortage of iron ore,
competitive bidding with lead to increase in iron ore prices. Sale of iron ore inventory is not
mandatory for the miner.
Only end-user industries can participate in this e-auction. Pellet producers are allowed to
participate provided they eventually sell the pellets in the domestic market. Moreover, no iron
ore can be purchased through this route for the purpose of stocking.
Further cost pressures, possible further slowdown in production
JSW had only 7 days of iron ore inventory when the mining ban was extended to the Chitradurga
and Tumkur region a week ago. JSW’s production will be impacted since the e-auction of iron ore
stockpile in Karnataka may take at least 10-15 days. JSW was sourcing 35-40% of its daily iron
requirements from the Chitradurga and Tumkur region. JSW may struggle to operate at its
previously stated 80% capacity utilization level (8.5 mn tonnes of production target will not be
achieved).
In addition, iron ore sourcing costs will also increase from the management-guided levels of
Rs3,200/tonne. One positive for the company is that the inventory lying unsold is made up majorly
of fines (70% fines) which could be utilized by only a few steelmakers besides JSW. We broadly
retain our estimates. We had already built in a potential impact on production though iron ore
sourcing costs may be higher than our estimates. A US$5/tonne increase in iron ore costs impacts
our FY2012E EBITDA and EPS estimates by 3.8% and 8.2%, respectively
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