Sesa Sterlite slumps on Supreme Court order

MEERA SIVA
BUSINESS LINE RESEARCH BUREAU
October 14, 2014:
Shares of mining major Sesa Sterlite were down over 5 per cent in the morning, after the Supreme Court ruled that iron-ore mined before 2007 belongs to the state of Goa.

15 million tonnes of iron ore has been confiscated from all the iron-ore miners in Goa. Of this 3 mt of iron ore stock belongs to Sesa. The company may stand to lose nearly $50 million, assuming a gain of $15-20 per tonne on sale price of $55-60 per tonne.

Iron ore mining in Goa has been facing multiple issues in the last two years. The Supreme Court imposed a mining ban in October 2012 and all iron ore auctions were stopped. The ban led to Sesa’s output dropping from nearly 14 mt annually earlier to near zero.

Things however perked up when the ban was partially lifted in April 2014. The court also allowed the e-auction of nearly 15 mt of iron-ore stock held by the State authorities. And recently, the Goa government indicated that it planned to renew the leases of miners who were found to have no or minimal violations.

With these positive developments, Sesa hopes to resume mining operations in early 2015. But there may be other issues that Sesa has to contend with. Iron ore attracts a 15 per cent royalty and 10 per cent contribution to be made towards an iron ore export fund on realisation. The Goan ore is low grade and not suitable for local steel industry, export is the only option. Export duty is high, at 30 per cent. Global iron ore prices have dropped over 42 per cent since the start of the year on China growth concerns. While Chinese import is looking up, the low price coupled with high mining costs would hurt Sesa’s profitability.

The company is also facing iron ore mining issues in Liberia. Start of mining operations, originally planned for December 2013, has slipped due to delays faced in obtaining clearances for constructing railroad for ore transport.

Additionally, Sesa is saddled with a huge debt burden of ₹806 billion as of March 2014. Of this, about two-third are U.S. dollar loans. While the debt is high, the company’s net debt to equity ratios is comfortable at 0.8 times. The company’s recent move to lend $1.25 billion from the cash pile of its oil and gas arm Cairn India to a subsidiary of Sesa was mired in controversy. ​

(This article was published on October 14, 2014)

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