)
For Indian steel makers like the Jindal brothers and Tata Steel, the proposed sale of assets by British metal trading firm Stemcor comes at an opportune time. One of the assets on the block is Aryan Mining & Trading Corporation which owns a mine in Odisha that can produce 5 million tonnes of the raw material every year - enough to make over 3 million tonnes of steel.
It so happens, iron ore is in short supply in the country, thanks to the ban on mining in Goa and Karnataka and restrictions imposed in Odisha. Though the Supreme Court has allowed the Karnataka mines to reopen after allegations of illegal mining were probed by a court-appointed panel, full restoration of supplies is going to take time. Over the past few weeks, expectations of resumption of iron ore mining and exports from Goa have gathered momentum as the Supreme Court has started hearings on the mining ban there. Analysts hope some exports should re-start from Goa next year, though the volumes could remain on the lower side. In Odisha, the country's largest iron ore producer, output has come down from 79.67 million tonnes in 2009-10 to 62.4 million tonnes in 2012-13 amid restrictions put by the state government following revelations of rampant illegal mining by the Shah Commission.
In this background, steel makers and metal companies- Tata Steel, the Jindal brothers (Sajjan and Navin Jindal), Mesco Steel, Vedanta and the Aditya Birla group- have queued up to take over Stemcor's assets which include a pellet plant and trading rights apart from the iron ore mine. The pellet plant has an annual capacity of 4 million tonnes. The plant, which can turn low-grade iron ore fines into chunks for use in blast furnaces, is also up for grabs.
Legal hassles
But there is a catch. The Kolkata High Court has stayed the asset sale following a petition by ICICI Bank that its Rs 587-crore exposure in the company will be jeopardised. The next date of hearing is October 7. Unless this row is resolved, the buyers have no option but to wait.
But what has brought thing to such a pass? Thanks to the global slowdown in the steel sector, Stemcor has failed to repay the debt of $850 million to its lenders led by local banks. The company has sought to reorganise its debt worth $1.25 billion and has time till year-end to repay the loan. The asset sale in India is a part of that plan. On September 20, Stemcor announced that it has signed a new standstill agreement with its bankers that extends to the end of the year. "During this period, the group expects to conclude its restructuring discussions regarding $1.25 billion of syndicated loans. Stemcor continues to meet its obligations to lenders, paying interest as it falls due," the company had said. It had added that discussions with lenders were now at an advanced stage and the company expected to finalise its restructuring, repayment and refinancing plan by the end of the year. The plan will be implemented during 2014 and 2015 and aims to provide a strong and sustainable financing platform to support Stemcor's trading activities and future growth.
And this is where Indian steel makers come in. Stemcor's iron ore mine is already in production. That's why serious players like Tata Steel, the Jindal brothers and Mesco Steel have submitted non-binding bids for the assets. These three companies have immediate requirements for iron ore and pellets for their nearby plants and are expected to make serious bids. The Vedanta group, the Aditya Birla group and the Ruias of Essar have also applied but may not make very aggressive bids. Goldman Sachs, which is running the auction on behalf of Stemcor, is now in the process of shortlisting the bidders, and at the same time is trying to sort out the legal impediments with ICICI Bank. A negotiated settlement is on the cards between Stemcor and ICICI Bank before the sale takes place, sources say.
Supply problems
"With the production of iron ore closed in Karnataka and Goa, there is a demand by Sajjan Jindal's JSW Steel plant (at Bellari in Karnataka) which is running at low capacity; it makes sense for him to buy the mine as well as the pellet plant which is already operational," says a banker advising one of the bidders. Similarly, the production at Naveen Jindal's Jindal Steel & Power factory in Odisha is suffering due to scarcity of iron ore; that's why the company has failed to increase the capacity of the plant. Jindal Steel & Power finds the Stemcor assets attractive and plans to jointly bid for them with JSW Steel. The company has said the assets have a geographical advantage and huge long-term potential. Its 4.5 million tonnes pellet plant in Barbil, Odisha, is expected to be commissioned by March next year and it would cater to the iron ore requirements of the 2 -million-tonne plant in Angul. JSW Steel too is on expansion mode and needs all the iron ore and pellets it can lay its hands on. In fact, the company is looking to sell its US pipe-making business so that it can invest more in India.
Bankers say the multiple bids for Stemcor's assets show that Indian companies are interested in mining assets in spite of the present slowdown in the industry. "It would, however, be interesting to see how many companies actually bid in the final auction process," a banker involved in the sale says. Meanwhile, a Platts report from London says Stemcor has invited final bids for its Indian iron ore assets to be submitted by mid-November from four Indian companies. Bhushan Steel, Essar Steel, JSPL and JSW were invited to table final bids. The firms were not available to comment. The Jindals are expected to make aggressive bids as both have immediate requirement for iron ore mines for their plants in operation in the same region. The first phase of Tata Steel's new plant in Kalinganagar, comprising 3 million tonnes of steel capacity, is slated for commissioning in the last quarter of 2013-14 and the Stemcor acquisition will help the new plant to access iron ore from there.
For the others in the race to acquire the assets, the reasons are different. Vedanta Chairman Anil Agarwal recently said the group is scouting for more energy and metal assets across India. This includes coal, oil and iron ore. Similarly, the Aditya Birla group is also hunting for metal assets which come with right valuation, says a group insider without commenting on the Stemcor sale. The Essar group already has an operational pellet plant in Paradeep in Odisha and sees synergistic benefits if it buys the Stemcor mine and plant. But given its own precarious state of financials with its debt downgraded to default category, bankers say the group may prefer to preserve cash in case there is a bidding war.
Similarly, Mideast Integrated Steel, a Mesco group company, is keen to acquire Stemcor assets as the latter's beneficiation plant is located next to its iron ore mines at Koira (Odisha); similarly, Stemcor's pellet plant is located next to the Mideast steel project in Kalinganagar. "Mideast had assigned certain trading rights to Stemcor for its products against project financing. The life of this arrangement was from 2004 to 2014. However, since Stemcor has stopped financing Mideast since 2008, it has practically no trading rights vis-à-vis Mideast's products at the moment," says JK Singh, chairman of Mesco Steel. Singh adds that since certain obligations for the 10 per cent stake of Mideast transferred to Stemcor have not been completed by the UK company, these shares cannot be transferred.
Meanwhile, the Odisha government is readying to raise certain objections to the transfer of the mining assets of Stemcor without its approval. "In the first place, we do not approve of Stemcor's purchase of Aryan Mining & Trading Corporation as this has been done without the consent of the state government. Since there is a substantial transfer of interest in a mining company, we consider it a violation of Rule 37 of Mineral Concession Rules, 1960. Though the rule lacks clarity on defining substantial stake, we interpret it as controlling stake, and accordingly we have issued a show-cause notice to the company. We have also consulted our law department on the legal validity of the transaction between Stemcor and Aryan Mining & Trading Corporation," says a senior functionary of the state's steel & mines department. "An amendment to Rule 37 is in the works, but till the amendment is done, we will act according to the existing regulation," he adds.
In this backdrop, any attempt to sell Stemcor's stake in Aryan Mining & Trading Corporation, circumventing the state authorities, may land the deal in trouble.
