Management Interaction Note
Sesa Goa Ltd.
Buy
Target Price: Rs192
CMP: Rs192.3
Downside: 0%
Positive vibes from WCL, Liberia
Sesa Goa (Sesa) recently announced the acquisition of balance 49% stake in Western Cluster Ltd (WCL), Liberia for US$33.5mn in cash from Elenilto Minerals & Mining LLC taking its stake in WCL to 100%. We had a detailed discussion with the Sesa management on the rationale for taking 100% ownership through residual stake purchase, the lower price for acquisition for residual stake which seemed to be a surprise and the prospects of WCL going ahead. We were impressed with the company's elaborate plans and see big potential for Sesa in future based on its development plans and comparison with ArcelorMittal’s Greenfield iron ore project in Liberia which started production recently. WCL is looking to start production from its Bomi Hills mine in the first phase with a production capacity of ~5 mtpa and is expected to announce the capex for the project (including development of port and railway logistics) soon. Please find below the excerpts of our interaction and comparison to the ArcelorMittal Liberia iron ore project which started shipments recently:
m Stake acquisition (Sesa now owns 100% in WCL)
o Sesa had spent US$90mn for 51% stake in WCL earlier but could get the remaining 49% for US$33.5mn now (cheaper by almost 55% in INR terms) as there were very few takers for the residual stake from the owners globally with Sesa already a majority owner. Sesa has now taken WCL 100% stake for ~Rs5.9bn.
o Sesa mentioned that taking the initial stake was the main achievement and it was not looking for any fund raising in WCL through the IPO route for the future large expected capex and so Elenilto decided to sell out to Sesa before that.
o Sesa also indicated that it wanted to develop the asset completely on its own and apply its management expertise for deriving value in the long term.
m Project Status of WCL
o WCL has progressed very smartly in its exploration work and has done 42000 mts of drilling till now, most of which is in Bomi Hills iron ore concession in WCL.
o WCL is expected to finalize packages for mining from Bomi Hills soon and is targeting its first shipment from Bomi before the end of FY14. The company has guided for ~5 mtpa capacity from Bomi in first phase.
o WCL has also started exploring the other two locations of Bea Mountains and Mano River. The long term production capacity by FY17E from all three deposits together is expected in the range of ~25-30 mtpa.
o The resource base in the three locations together would be announced by the company once the explorations are certified by recognized agencies but it is believed that the resource base would be well above the 1bn tonne mark, which was announced by Sesa at the time of its 51% stake acquisition. Elenilto announced resource base as 3bn tonne recently after its aerial survey after 30000 mts of drilling.
o The ore present in the resources consists mainly of Proterozoic banded iron formations (BIF), and is comprised primarily of quartz, hematite, and magnetite. The company plans to beneficiate and process the ore and sell it as a high grade concentrate in the global seaborne ore market.
Our View:
We are excited at the prospects of WCL from a long term view but await details on project capex and its funding. We believe that significant value could be added to Sesa by WCL if costs remain in the guided range and capex requirement is not very large (comparison with ArcelorMittal’s Greenfield iron ore project in Liberia gives confidence on the same). We also keep a close eye on regulatory hurdles and political situation in Liberia but don’t see them as a major hurdle as of now. We do not change our estimates for Sesa in relation with WCL as of now as we believe that production could still be a few years away. We maintain our target of Rs192 and buy rating for Sesa (based on SOTP valuation of proposed Sesa Sterlite merged entity) but are currently reviewing this and our target price could see upward revision from WCL as more clarity emerges.
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