Moody's: Tata Steel may face higher raw material costs due to shutdown of mines in Odisha

Moody's Investors Service says that if Tata Steel Ltd's (Ba3 negative) seven mines in the Indian state of Odisha stay closed for over a year, the company's only operational crude steel making facility in India will likely face higher raw material costs and lower EBITDA levels.

All 26 mines in Odisha -- including Tata Steel's seven captive iron ore mines -- were ordered to cease production pending reviews of their leases. The orders come on the heels of the iron ore mining shutdowns in the states of Karnataka and Goa, inspired by the outcome of the Shah Commission report and investigation into illegal mining.

Moody's notes that India's Supreme Court has instructed the state of Odisha to resolve the matter of the mine closures within six months. In addition, five of the 26 licenses under review have reportedly been recommended for renewal, including one of Tata Steel's mines.

Moody's points out that the bulk of Tata Steel's iron ore supply is mined in Odisha.

"We note that if the outcome in Odisha mirrors that in Goa and Karnataka then, even when the issues are resolved, the approved extraction rate may fall short of the previous rate of iron ore production," says Alan Greene, a Moody's Vice President and Senior Credit Officer.

"Moreover, the timing of the shutdown is inconvenient for Tata Steel. Over the next 9-12 months it is still spending heavily on its new steelworks prior to the start of commercial operations scheduled for early 2015," adds Greene.

"At the same time, the company is looking to refinance Tata Steel UK Holdings Ltd's acquisition debt, before its covenant conditions tighten in September 2015."

Nevertheless, Moody's does not expect Tata Steel's production rate to slow. Its operational crude steel making facility in India takes iron ore from the state of Jharkhand as well as from Odisha.

At fiscal year ended 31 March 2014, the company reported inventories equal to 71 days of cost of goods sold. Moody's also believes Tata Steel has accumulated prudent stocks of iron ore at the mines, in transit and on site.

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