Shares of Vedanta, one of the largest producers and exporters of low-grade iron ore, did not react much after the Supreme Court cancelled the iron ore mining leases of 88 companies in Goa.
While the company’s exports may be affected by the decision, the impact on domestic sales will be marginal as much of the iron ore mined from Goa gets exported to China. Profits from the exports are already subdued due to the unfavourable pricing environment.
The Supreme Court in 2014 lifted the ban on iron ore mining in Goa but capped production at 20 million tonnes per annum (mtpa).
In 2015, the Goa government gave clearance for second renewal of iron ore mining leases to 88 companies.
On Wednesday, the Supreme Court quashed the renewals given in 2015, stating that the State governments could only give fresh leases and not second renewals. However, it provided a reprieve for the companies by directing them to stop mining operations only after March 15 this year until fresh mining leases (not fresh renewals or other renewals) and fresh environmental clearances are granted.
Out of the 20 mtpa mining capacity in Goa, Vedanta operates 5.5 mtpa. In addition, 3 mt was allocated by the Goa government in the current financial year, there is some uncertainty regarding mine lease renewals for these mines. Apart from this, the company has 2.3 mtpa production capacity in Karnataka.
A significant portion of iron ore from the mines in Goa is exported due to the low proportion of iron content. Not surprisingly, in FY 2017, 65 per cent of Vedanta’s iron ore production, comprising low grade ore from Goa, was exported, notably to China.
The mineral has contributed nearly 6 per cent to the consolidated operating profit of the company with margins at 31.6 per cent for the same period.
High quality ore
In the recent, third quarter of FY 2018, iron ore contributed up to 3 per cent to the operating profits.
This amounts to ₹231 crore, or just half the contribution a year ago. This could be attributed to the lower production and sales volumes in the quarter due to lower margins in the export market, which is shifting to the usage of high quality iron ore.
To overcome this impact, Vedanta has commenced production of high quality ore through beneficiation and blending, which will result in improved realisations and margins.
On account of extended monsoons and the lower pricing environment, the company’s production and sales volumes of ore were lower in the third quarter ending December 2017 compared to the same quarter the previous year.
For the nine-month period, the company recorded sales and production of 3 mt and 3.4 mt from Goa.
The company had planned 5.5 mtpa for FY 2018 from the Goa mines. But this now under a cloud. The companies are allowed to mine till March 15, after which they ought to cease operations. As the apex court has directed, companies can resume operations if fresh environmental clearances are given.
‘All options on table’
PTI adds: Talking to the media in Panaji, Goa Chief Minister Manohar Parrikar said his government will explore all options, including auction of mining leases, to ensure that the industry is not affected by the Supreme Court order setting aside the second renewal of 88 iron ore mining leases.
“All possible ways including auction would be explored. I am not ruling out auction, but I am not confirming it (either). There are multiple options at this stage. We need to discuss it properly with relevant people,” said Parrikar.
The Supreme Court has not prohibited export of ore, he noted.
“Exports never happens directly from the mining lease. The ore is dumped at the jetty and then transported using a barge. There is no connection between export and extraction,” Parrikar said, adding that the setback caused by the apex court’s order would be temporary.