Tata Steel - Odisha Mining Shutdown to Escalate Iron Ore Cost:: Edelweiss

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The Odisha mining ban issue has resurfaced, leading to closure of Tata Steel’s (Tata) iron ore mines (~70% of India requirement) in the state. The shutdown is a result of expiry of 6 months (ending November 15, 2014) given for signing mining lease after fulfilling the stipulated conditions (including obtaining requisite approvals). It may be recalled that post the Supreme Court (SC) order on May 16, 2014, imposing a ban on all mines operating on second and subsequent deemed renewal basis, interim relief had been granted to captive miners to continue mining through an express order. While the reason for Tata’s inability to procure the requisite approvals is not known, the closure will force it to procure iron ore from external/imported sources. On similar lines, while mines in Jharkhand are already shut (we assume restart only in FY16), the Odisha issue comes as a negative surprise. We expect the Odisha mines to restart only in FY16 and accordingly prune FY15E EBITDA ~11% factoring in higher cost of bought out/imported iron ore. While the issue will have an overhang on the stock in the near term, we expect all captive mines to restart in FY16.

Silver lining: Mining order may have been secured, subject to terms

As per our channel checks, Tata is believed to have secured the renewal order, subject to certain conditions (not known to us). While the restart of balance 18 mines (of 26 that were shut) remains in jeopardy, SAIL has already inked the mining lease given the preference for captive miners and its PSU status. Though we expect Tata too to be able to comply with the requirements and start operations soon, the short-term impact (of high iron ore cost) seems inevitable for a few months. Assuming 70% imported and balance 30% domestic iron ore, in our view, the company will have to foot an additional INR4.5bn per month of extra cost.

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https://www.edelweiss.in/research/Tata-Steel--Odisha-Mining-Shutdown-to-Escalate-Iron-Ore-Cost/27683.html