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Tata Steel: Does it need Stemcor's assets?

A slowdown in Europe has pushed the Britain-based Stemcor into a financial crisis. The cash crunch has forced the company to offload some of its physical assets, including its iron ore mine in Odisha

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Iron-ore, the basic raw material for making steel, has become a desired commodity for most of the Indian steel majors planning expansion given the on this commodity in some states. No wonder, is bidding for the Indian iron-ore assets of Stemcor, Britain's largest independent steel trading companies. Jindal Steel and are also reported to be bidding jointly.

A slowdown in Europe has pushed the Britain-based into a financial crisis. The cash crunch has forced the company to offload some of its physical assets, including its mine in Odisha which could fetch an estimated $750-850 million, according to reports.

Tata Steel slipped to Rs 197 levels in trade on Tuesday, hitting its lowest levels since December 2008 on the Bombay Stock Exchange. The stock has underperformed the market, by falling 25.4 per cent in past one month as compared to 3.4 per cent fall in benchmark S&P BSE Sensex and 15% decline in the S&P BSE Metal index.

How big is Stemcore?

Stemcor had reported a turnover of over £5 billion in 2012 and trades around 20 million tonnes of steel and steel-making raw materials per annum. Its iron-ore assets include its majority stake in Aryan Mining and Trading Corporation, which has 100 million tonnes (MT) of iron-ore reserves with the license to mine three million tonnes per annum in Odisha.

Besides, the company has a 10 per cent stake in Mideast Integrated Steel whose mines in Odisha have more than 1000 MT of iron-ore reserves with an approved mining plan up to three million tonnes is in place. Mideast has already applied for another six million tonnes.

Stemcore’s wholly-owned subsidiary, Brahmani River Pellets Ltd, has a four million tonne per annum (MTPA) beneficiation plant at Barbil, Odisha, and a pellet plant complex at Jajpur in Odisha.

How does it fit into Tata Steel’s plans?

So, how important is Stemcor to Tata Steel’s plans and should it bid at a time when the rupee is at record low and the overall economy is slowing down? The demand for its products, too, will be impacted given the global economic environment, especially China.

“The steep rupee depreciation would mitigate the drop in international metal prices and we expect an improvement in realisation for the non-ferrous segment, while it is expected to remain flattish for the ferrous segment as players wouldn't be able to pass on the entire rise in prices because of rupee depreciation following weak demand,” points out Giriraj Daga, an analyst with Nirmal Bang.

Tata Steel though has captive iron-ore supplies adequate to meet its present requirement; the company is planning to set up a Greenfield plant at Kalinganagar in Odisha. The six million tonne plant which will go on-stream in two phases of 3 MT each at a total cost of over Rs 30,000 crore is awaiting iron-ore mine allocation. Hence, Stemcor’s assets are of value to the company, analysts say.

Points out Abhisar Jain, an analyst at Centrum Broking: “The assets are definitely of value to Tata Steel. However, it remains to be seen as to how aggressive the company gets while bidding and the final amount it has to pay in case the bid is successful. This is of importance as Tata Steel still has a huge amount of debt on books. The company may want to re-look this strategy and feed its greenfield plant from existing iron-ore reserves in case the bid price is too high.”

Meanwhile, a recent ICICI Securities report maintains a ‘buy’ rating on the stock with a price target of Rs 301 on the possibility that the company will beat Street estimates while announcing its June quarter numbers.

“We see scope for a consolidated EBITDA beat on two accounts: i) QoQ flat realisations in the standalone business (countering the trend we have seen for JSW Steel), and ii) a higher-than-expected EBITDA for Tata Steel Europe (TSE). We draw confidence from the quarter-on-quarter report of ArcelorMittal Flat Carbon Europe (FCE) where we have witnessed an EBITDA improvement. Even after factoring the impact of forex losses on account of standalone debt, the beat can be meaningful (~18%),” the report says.

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