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UBS Investment Research
India Metals & Mining
SC allows sale of 25mt iron ore inventory
„ Event: SC allows sale of 25mt iron ore inventory lying with miners
As per media reports the honourable Supreme Court (SC) has accepted CEC
recommendation of releasing 1.5 mt of iron ore per month from the 25 mt
inventory in Karnataka. Sale would happen through e-auction by MSTC (govt of
India's trading company). Reserve price for the auction would be based on NMDC
price (Rs2880/t/US$64/t ex-mines vs. China CIF price of US$188/t for 63.5% Fe
grade). However, the final sale price in auction could be higher. As per JSW
management there is no compulsion on the private miners to sell their inventory.
„ Impact: +ve for JSW Steel; marginally +ve for Sesa
This development is positive for JSW Steel and the steel industry dependent on
iron ore from Karnataka. This 18mtpa (1.5 mtpm) from e-auction + up to 7mtpa
from NMDC in Karnataka (our channel checks indicate NMDC can only produce
c7mtpa this yr., though SC has allowed 12mtpa ) should suffice the needs of the
steel industry in Karnataka which consumed c26 mt in FY11. Sesa Goa has
c1.5mtpa inventory in Karnataka and this event should be positive for Sesa as well.
„ Action: Limited downside to JSW volumes; iron ore cost could be higher
For JSW we have estimated 8.5mt of saleable steel sales for FY12 and see limited
downside risk to this. However, there could be cUS$25-30/t downside risk to our
EBITDA estimates of US$137/175 for FY12/13(Q1FY12A-US$180/t) due to
higher iron ore prices. We maintain a Buy on JSW and also on Sesa Goa.
SC judgement
As we had highlighted in our report “Karnataka mining ban – Round II” dated
Aug 29, 2011, the honourable SC has come out with a practical solution for now,
allowing the sale of 25 mt inventory held by miners in the state of Karnataka in
a phased manner (1.5 mt per month). The CEC estimates two-thirds of the
inventory to be fines and rest to be lumps.
Sale would happen through e-auction by MSTC (govt of India's trading
company). Reserve price for the auction would be based on NMDC price and
auction could take the price higher. As per JSW management, the SC in its
judgement has imposed a slew of restrictions related to the sale process &
participants:
Q Steel & related end user industries of iron ore only eligible to participate.
Q No middlemen and traders are allowed to participate.
Q No buyer is allowed to overstock.
Q Pellet plants are allowed to buy, but not allowed to exports pellets produced
from this ore.
Q Sale is not restricted to steel mills based out of Karnataka. Any mill which
was dependent on Karnataka pre-ban will be allowed to participate. The
transportation and movement of the ore will be as per the guidelines laid out
by the CEC panel.
Q Sale proceeds distribution will be handled by MSTC. Initially proceeds will
be put in some kind of an escrow account and later allocated to the miners.
JSW management believes that the modalities related to the e-auction, sale
process and transportation will be sorted out in 7-10 days.
Impact on JSW Steel & steel industry
This development is positive for JSW Steel and the steel industry dependent on
iron ore from Karnataka. This 18mtpa (1.5 mtpm) from e-auction + up to 7mtpa
from NMDC in Karnataka (our channel checks indicate NMDC can only
produce @c7mtpa this yr., though SC has allowed 12mtpa) should suffice the
needs of the steel industry in Karnataka which consumed c26 mt in FY11.
Impact on Sesa Goa
We estimate Sesa Goa has c1.5mt inventory in Karnataka and this development
is positive for Sesa as it can liquidate the inventory. We are currently reviewing
our volume estimates for Sesa and there is likely to be downside risk to our
volume estimates of 24.9mt /29.4mt for FY12/13.
Update on supply from NMDC
As per JSW management:
Q NMDC is steadily improving supplies. NMDC is currently supplying 15k to
20k tons per day (lumps +fines mix).
Q NMDC is quickly ramping up to 10mtpa, and will scale to 12 mtpa soon in
Karnataka.
As per channel checks with NMDC:
Q NMDC will only be able to scale up to - 7 mtpa (Donimalai mine- 5 mt +
Kumaraswamy mine- 2 mt) this yr in Karnataka. Our contacts also indicated
that NMDC is supplying close to 22-23 kt per day to JSW (3 rakes (1 rake =
4,000 tons) from Chhattisgarh + 2 rakes from Donimalai mine in Karnataka
+ 2k-3k from Kumaraswamy mine in Karnataka, which is higher than what
JSW management is saying.
Iron ore prices in Karnataka
Q NMDC is selling at Rs2880/t ex-mines both from Chhattisgarh and
Karnataka to JSW. (Transportation cost from Chhattisgarh to Karnataka
would be cRs1200/t).
Q Our channel checks indicate that the iron ore price in the auction is unlikely
to be higher by more than Rs1000-1200/t vs the reserve price of Rs2880/t
implying an EBITDA/t impact on JSW on a blended basis cUS$25-30/t
(assuming no pass through in steel prices).
Steel prices
Q There has been no meaningful increase in domestic steel prices due to the
Karnataka ban.
Q However, prices are firming up in international market (China HRC up 1% in
the last 1 month to RMB4840/t) and the rupee depreciation in the last few
days is also likely to help push prices up in India.
Q Media reports indicate that the larger steel mills in India – Tata Steel, JSW,
SAIL and Essar Steel – are likely to increase HRC prices by Rs1000/t in. An
increase in steel prices will reduce the impact of higher iron ore cost on the
profitability of JSW.
Conclusion
Q The SC judgment is a positive development for JSW and other steel mills in
Karnataka as adequate supply of iron ore has been ensured.
— We also believe, in c2-3 months from now, once the state government &
Indian Council of Forestry Research and Education submit their reports
on rehabilitation & reclamation/environmental damage impact assessment
respectively, the SC will take a more practical view on the blanket mining
ban and allow legal mining given a) the substantial investments made by
the steel companies in Karnataka and b) the impact on employment in the
region.
— Additionally, the Karnataka Lokayukta, justice Santosh Hegde mentioned
in a recent interview that limited mining could be allowed in Karnataka
(with strict restrictions) to ensure adequate availability of iron ore to steel
industry in Karnataka (& not for iron ore exports).
— For JSW, we have estimated 8.5mt of saleable steel sales for FY12 and
see limited downside risk to this.
Q However, the cost of iron ore for steel mills in Karnataka (including JSW) is
likely to be higher.
— Our channel checks indicate that the final sale price in the auction is
likely to be higher than the reserve price of NMDC, but unlikely to be
higher by more than cRs1000-1200/t vs the NMDC reserve price of
US$2880/t impacting the overall EBITDA of JSW by cUS$25-30/t.
We maintain a Buy rating on JSW and a SOTP-derived Price Target of Rs1300.
Q The judgement is also positive for Sesa Goa as it can liquidate c1.5mt
inventory that it holds in Karnataka in the e-auction at a price that should be
higher than its normal selling price.
We have a Buy on Sesa. We are currently reviewing our volume estimates for
Sesa and there is likely to be downside to our volume estimates of 24.9mt
/29.4mt for FY12/13.
Q Statement of Risk
Government intervention, mining taxes, volatility in metals and mineral prices,
environmental approvals/delays are key risks in the Indian metals and mining
sector.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Metals & Mining
SC allows sale of 25mt iron ore inventory
„ Event: SC allows sale of 25mt iron ore inventory lying with miners
As per media reports the honourable Supreme Court (SC) has accepted CEC
recommendation of releasing 1.5 mt of iron ore per month from the 25 mt
inventory in Karnataka. Sale would happen through e-auction by MSTC (govt of
India's trading company). Reserve price for the auction would be based on NMDC
price (Rs2880/t/US$64/t ex-mines vs. China CIF price of US$188/t for 63.5% Fe
grade). However, the final sale price in auction could be higher. As per JSW
management there is no compulsion on the private miners to sell their inventory.
„ Impact: +ve for JSW Steel; marginally +ve for Sesa
This development is positive for JSW Steel and the steel industry dependent on
iron ore from Karnataka. This 18mtpa (1.5 mtpm) from e-auction + up to 7mtpa
from NMDC in Karnataka (our channel checks indicate NMDC can only produce
c7mtpa this yr., though SC has allowed 12mtpa ) should suffice the needs of the
steel industry in Karnataka which consumed c26 mt in FY11. Sesa Goa has
c1.5mtpa inventory in Karnataka and this event should be positive for Sesa as well.
„ Action: Limited downside to JSW volumes; iron ore cost could be higher
For JSW we have estimated 8.5mt of saleable steel sales for FY12 and see limited
downside risk to this. However, there could be cUS$25-30/t downside risk to our
EBITDA estimates of US$137/175 for FY12/13(Q1FY12A-US$180/t) due to
higher iron ore prices. We maintain a Buy on JSW and also on Sesa Goa.
SC judgement
As we had highlighted in our report “Karnataka mining ban – Round II” dated
Aug 29, 2011, the honourable SC has come out with a practical solution for now,
allowing the sale of 25 mt inventory held by miners in the state of Karnataka in
a phased manner (1.5 mt per month). The CEC estimates two-thirds of the
inventory to be fines and rest to be lumps.
Sale would happen through e-auction by MSTC (govt of India's trading
company). Reserve price for the auction would be based on NMDC price and
auction could take the price higher. As per JSW management, the SC in its
judgement has imposed a slew of restrictions related to the sale process &
participants:
Q Steel & related end user industries of iron ore only eligible to participate.
Q No middlemen and traders are allowed to participate.
Q No buyer is allowed to overstock.
Q Pellet plants are allowed to buy, but not allowed to exports pellets produced
from this ore.
Q Sale is not restricted to steel mills based out of Karnataka. Any mill which
was dependent on Karnataka pre-ban will be allowed to participate. The
transportation and movement of the ore will be as per the guidelines laid out
by the CEC panel.
Q Sale proceeds distribution will be handled by MSTC. Initially proceeds will
be put in some kind of an escrow account and later allocated to the miners.
JSW management believes that the modalities related to the e-auction, sale
process and transportation will be sorted out in 7-10 days.
Impact on JSW Steel & steel industry
This development is positive for JSW Steel and the steel industry dependent on
iron ore from Karnataka. This 18mtpa (1.5 mtpm) from e-auction + up to 7mtpa
from NMDC in Karnataka (our channel checks indicate NMDC can only
produce @c7mtpa this yr., though SC has allowed 12mtpa) should suffice the
needs of the steel industry in Karnataka which consumed c26 mt in FY11.
Impact on Sesa Goa
We estimate Sesa Goa has c1.5mt inventory in Karnataka and this development
is positive for Sesa as it can liquidate the inventory. We are currently reviewing
our volume estimates for Sesa and there is likely to be downside risk to our
volume estimates of 24.9mt /29.4mt for FY12/13.
Update on supply from NMDC
As per JSW management:
Q NMDC is steadily improving supplies. NMDC is currently supplying 15k to
20k tons per day (lumps +fines mix).
Q NMDC is quickly ramping up to 10mtpa, and will scale to 12 mtpa soon in
Karnataka.
As per channel checks with NMDC:
Q NMDC will only be able to scale up to - 7 mtpa (Donimalai mine- 5 mt +
Kumaraswamy mine- 2 mt) this yr in Karnataka. Our contacts also indicated
that NMDC is supplying close to 22-23 kt per day to JSW (3 rakes (1 rake =
4,000 tons) from Chhattisgarh + 2 rakes from Donimalai mine in Karnataka
+ 2k-3k from Kumaraswamy mine in Karnataka, which is higher than what
JSW management is saying.
Iron ore prices in Karnataka
Q NMDC is selling at Rs2880/t ex-mines both from Chhattisgarh and
Karnataka to JSW. (Transportation cost from Chhattisgarh to Karnataka
would be cRs1200/t).
Q Our channel checks indicate that the iron ore price in the auction is unlikely
to be higher by more than Rs1000-1200/t vs the reserve price of Rs2880/t
implying an EBITDA/t impact on JSW on a blended basis cUS$25-30/t
(assuming no pass through in steel prices).
Steel prices
Q There has been no meaningful increase in domestic steel prices due to the
Karnataka ban.
Q However, prices are firming up in international market (China HRC up 1% in
the last 1 month to RMB4840/t) and the rupee depreciation in the last few
days is also likely to help push prices up in India.
Q Media reports indicate that the larger steel mills in India – Tata Steel, JSW,
SAIL and Essar Steel – are likely to increase HRC prices by Rs1000/t in. An
increase in steel prices will reduce the impact of higher iron ore cost on the
profitability of JSW.
Conclusion
Q The SC judgment is a positive development for JSW and other steel mills in
Karnataka as adequate supply of iron ore has been ensured.
— We also believe, in c2-3 months from now, once the state government &
Indian Council of Forestry Research and Education submit their reports
on rehabilitation & reclamation/environmental damage impact assessment
respectively, the SC will take a more practical view on the blanket mining
ban and allow legal mining given a) the substantial investments made by
the steel companies in Karnataka and b) the impact on employment in the
region.
— Additionally, the Karnataka Lokayukta, justice Santosh Hegde mentioned
in a recent interview that limited mining could be allowed in Karnataka
(with strict restrictions) to ensure adequate availability of iron ore to steel
industry in Karnataka (& not for iron ore exports).
— For JSW, we have estimated 8.5mt of saleable steel sales for FY12 and
see limited downside risk to this.
Q However, the cost of iron ore for steel mills in Karnataka (including JSW) is
likely to be higher.
— Our channel checks indicate that the final sale price in the auction is
likely to be higher than the reserve price of NMDC, but unlikely to be
higher by more than cRs1000-1200/t vs the NMDC reserve price of
US$2880/t impacting the overall EBITDA of JSW by cUS$25-30/t.
We maintain a Buy rating on JSW and a SOTP-derived Price Target of Rs1300.
Q The judgement is also positive for Sesa Goa as it can liquidate c1.5mt
inventory that it holds in Karnataka in the e-auction at a price that should be
higher than its normal selling price.
We have a Buy on Sesa. We are currently reviewing our volume estimates for
Sesa and there is likely to be downside to our volume estimates of 24.9mt
/29.4mt for FY12/13.
Q Statement of Risk
Government intervention, mining taxes, volatility in metals and mineral prices,
environmental approvals/delays are key risks in the Indian metals and mining
sector.
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