Sesa Sterlite: Goa mining leases not a big catalyst

Analysts estimate Goa mines to produce 1.1 mt in FY15, which pales in comparison to its capacity of 14 mt

Something, they say, is always better than nothing. It's for this reason that shares of Sesa Sterlite rose 3.3 per cent on Tuesday, after the Goa government announced it would issue 27 mining licences. Analysts tracking the stock are not surprised, as it was a given that the state government would issue licences. However, even if mining resumes in Goa, it will not have a material impact on Sesa Sterlite (the only listed company to be impacted by the decision) for a number of reasons.

For starters, higher output is something that analysts were anyway building in from Sesa Sterlite's mines in Goa but the higher output is nowhere near the company's capacity a few years ago. The company has permission to mine 2.29 million tonnes (mt) in Karnataka and it has forecast the same for FY15. Even though mining operations were suspended in Goa, analysts were building between one mt and two mt from Goa in FY15 and five mt in FY16.

Emkay Global's Goutam Chakraborty is factoring in 1.1 mt iron ore output from Goa in FY15 and five mt in FY16. However, how well the company ramps up production in coming quarters is more important that the output in the two years. Abhisar Jain of Centrum Broking says: "Sesa has a total capacity of 14 mt in Goa across three mines. It depends how much clearance they get from environmental agencies on annual output per mine. We are estimating four-mt production in FY16."

Before the mining ban in both states, Sesa Goa's ore output from Karnataka (six mt) and Goa (14 mt) was 20 mt, which the company sought to increase to 50 mt. From that point of view, the lease renewal this year and output of a couple of million tonnes may not have any material impact on Sesa Goa's operating profit nor at the consolidated level (Sesa Sterlite). At the end of FY10, ore production in India stood at 218 mt, which dropped to 135 mt in FY13. In FY12, Sesa Goa's iron ore output declined 26.6 per cent to 13.8 mt compared to the previous financial year.

Capacity constraints are not the only issue as far as Sesa's iron ore business is concerned. A sharp fall in global iron ore prices will also render Sesa's ore exports unviable. Sesa's Goa mines produce low grade (55-58 FE grade) ore, which is not consumed by Indian steel makers. Most of Sesa's output was exported till the export tax was hiked to 30 per cent on pellets. In June, the price of low grade ore fell to $82 a tonne. After adjusting for freight on board the Indian ore would be priced at $66-67 a tonne. Analysts believe at these levels profitability would be a challenge. Also, so far Indian exports have been absent. If they return, then ore prices could fall further, explains Chakraborty.