Sesa Goa: Not a sunny outlook

The bounce back in the Sesa Goa stock of 17 per cent in the last week or so is surprising and at Rs 85 and a valuation of 5.5 times estimated 2009-10 earnings, the stock is not cheap.

That’s because the outlook for iron ore prices isn’t too bright. Although prices rose from their October 2008 lows of $63 per tonne to around $85 per tonne in February 2009, it had more to do with re-stocking by Chinese mills who were simply maintaining inventories.

Since spot prices had fallen, the mills used the opportunity to stock up and that pushed up prices. However, spot rates seem to be coming off and have fallen 25 per cent from the February highs to the current levels of $68 per tonne.

 

Merrill Lynch believes the production cuts by steel makers will not be reversed in a hurry which means demand for ore will be subdued. It reckons there will be a surplus of ore to the tune of 117-183 million tonnes over 2009-11. That can’t be good news for Sesa Goa which exports over 90 per cent of its iron ore.

The low cost of production — average fob cost of around $26 per tonne, though should help it arrest the fall in profits. Analysts estimate a fall in net sales of about 16-17 per cent in 2009-10 with a somewhat sharper drop in net profits.