Stemcor eyes more of Ispat

Wants to buy out pellet plant, hike equity beyond 10%.

Stemcor, which last month agreed to pick up 10 per cent in Ispat Industries, is now hungry for more. The Indian arm of one of the world’s largest steel trading companies has sent feelers to Ispat to buy it out entirely from its 3 million tonne per annum pellet plant.

The final negotiations now underway may also see UK-based Stemcor hiking its stake in Ispat beyond 10 per cent. Ispat is promoted by Vinod and Pramod Mittal, brothers of the world’s largest steel maker, LN Mittal.

“Till now we have signed a shareholders’ agreement with Ispat only for the coke oven battery. Discussions on all other counts (pellet plant and power plant), including the stake sale in the parent company, are underway. We have only signed a memorandum of understanding. The full clarity will emerge in a month’s time,” Stemcor India Managing Director Mathew Stock said.

On September 19, cash-strapped Ispat Industries, which has a debt of around Rs 6,700 crore on its books, announced a strategic co-operation agreement with Stemcor. As part of the deal, Ispat agreed to prefentially allot 10 per cent equity to Stemcor for Rs 250-300 crore. Apart from equity, Stemcor was to also help Ispat build a one million-tonne per annum coke oven plant, a pellet plant and a 110-Mw power plant at Dolvi in Maharastra.

In all the proposed joint ventures, Stemcor was to hold 74 per cent equity, with Ispat holding the residual 26 per cent. The combined investments were to exceed Rs 3,000 crore.

But Stemcor is now keen to buy out Ispat entirely from its pellet plant project and has made its intention known. “We would like to have 100 per cent stake in the pellet project. There is a lot of demand in the western region for pellets and there are no plants. So we see this as a great opportunity. Since Ispat’s contribution in the pellet plant is only the land, we are in talks with it to buy the land or to lease it for a long term.” said Stock.

According to Stock, Ispat's own requirement for pellets is 2 million tonne per annum. The additional million tonne can be sold to third party customers who will guarantee offtake.

Stemcor is already setting up a four million tonne pellet plant in Orissa with an investment of close to Rs 1,500 crore. The plant will be operational next month. The raw material for the Orissa project will come from its own mines in the state. The extra supplies can be diverted to the Ispat plant in Maharastra, if required. "If we feed our own iron ore in the plant then we would like to capture the full value of that," Stock said. The objective for Stemcor is to have a plant each in the east and the west coast.

Pellet pricing will also be crucial for the deal. "If we use 100 per cent of our own iron ore then we expect Ispat to pay us the market rate for the pellets," said Stock. But with Ispat having its own iron ore supply deal with NMDC, Stock also made it clear that if Ispat's ore supply is used in the proposed pellet plant then it will get a negotiated price that is lower than market rate.

Apart from the pellet plant, Stock said that the company is also keen in setting up a three million tone benefication plant next door to add value to the iron ore that will come out of the pellet unit. The benefication plant will require an investment of Rs 500-Rs 700 crore.

Ispat Industries Director (finance) Anil Sureka did not comment. He said, "The deal is still under negotiations and will take 30 to 40 days more to seal." When asked specifically about Stemcor's intention to wholly own the pellet plant or raise equity in the company, Sureka said: "This is news to me."

Sources added the 15 lenders of Ispat Industries, who just a month back had threatened to induct a strategic player in the company, will play a crucial role in these final negotiations between Ispat and Stemcor. As of now, they are not revealing their strategy. A debt restructuring approved by Ispat's shareholders give them the option to convert part of their loan into equity and hike their combined stake to 31 per cent from the current 10.9 per cent in case of a default. Indian banks like State Bank of India, IDBI and ICICI Bank have a $1.5 billion exposure to Ispat.