Stocks

Tata Steel hedging its bets

Adarsh Gopalakrishnan | Updated on March 03, 2011

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Recent filings with the exchanges indicate that Tata Steel has spent around Rs 500 crore to hike its stake in Riversdale Mining from 24 per cent to 27 per cent.

This move sent jitters through the market sending the stock down 2.1 per cent. Tata Steel's move signals its intention to secure stake and offtake in Riversdale's Mozambique mines which are expected to supply coking coal from October.

It also suggests that the company is unlikely to cash out its stake in the miner.

Coming on the heels of cashing a cheque for just under $500 million from selling its Teesside Plant, the company's move could be viewed as a bargaining chip to ensure that the promised coking coal reaches its European operations.

Offloading Teesside will help the company with much needed cash for improving raw material linkages for the European operations.

The company is in talks with New Millennium Capital Corp to further invest and develop two Canadian iron ore properties. These mines are expected to require significant capital to develop railroads among other infrastructure to transport the ore to ports.

Tata Steel holds 80 per cent of New Millennium's Direct Shipping Ore project and has been engaging the Canadian miner in exclusive talks. The Canadian miner does hold the upper hand as several Chinese steel producers are reported to be keen on jumping in the fray.

For Tata Steel, New Millennium and Riversdale deals are crucial catalysts in its effort to boost margins.

LOW ODDS

The possibility of a bidding war with Rio Tinto for Riversdale Mining, however, seems remote, given the $10.4-billion debt weighing down on Tata Steel.

But if a bidding war happens, the leaner Rio Tinto, flush with cash from a super-profitable 2010, is in a far better position to out-muscle Tata Steel.

The cumulative 47 per cent stake held by Brazilian steel producer CSN and Tata Steel are likely to be a major spoke in Rio's bid to capture Riversdale.

The stake hike is best viewed in the context of Tata Steel looking to maximise, hedge and ultimately profit from its economic position in Riversdale which is likely to become its leading supplier of coking coal.

Published on March 03, 2011

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