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Shares of mining major Sesa Sterlite were down over 5 per cent in the morning, after the Supreme Court upheld its April 2014 order that iron-ore mined before 2007 belongs to the State of Goa. The stock, however, pared its losses and closed flat for the day after the company clarified that there is no change to the order given in April 2014 and hence there is no impact.
Around 15 million tonnes of iron ore has been confiscated from all the iron ore miners in Goa. Of this three mt of iron ore stock belongs to Sesa. Had the ore been handed over, the company would have earned nearly Rs. 300 crore, assuming a gain of Rs. 900-1,200 a tonne (sale price of Rs. 3,330-3,600 a tonne). The company will now only receive a nominal mining cost for the ore.
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 which 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.
Challenges
With these positive developments, Sesa hopes to resume mining operations in early 2015. But there may be other issues that it has to deal 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. Since 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 demand is looking up, the low price coupled with high mining costs would hurt Sesa’s profitability in the iron ore segment.
Additionally, Sesa is saddled with a huge debt burden of Rs. 80,600 crore as of March.
The company’s net debt-to-equity ratio is, however, comfortable, at 0.8 times. Its recent move to lend Rs. 7,500 crore from the cash pile of its oil and gas arm Cairn India to a subsidiary of Sesa Sterlite was mired in controversy.
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