Mining Ban Impacts Sesa Goa’s June Quarter Results

Sesa Goa, the biggest private iron ore mining company, announced its results on Wednesday, July 25, 2012. The consolidated net sales of the company declined by 14.6 per cent on a YoY basis to Rs 1,933 crore while the net profit of the company is down by 76 per cent on a YoY basis to Rs 198 crore. The decline in the topline and bottomline is on the back of a decrease in the sales volume during the quarter, which fell significantly by 20 per cent YoY.

The production of iron ore during the quarter stood at 3.4 million tonnes lower as compared to that of 4.40 million tonnes in Q1FY11. The primary reason for the fall in sales and production has been the ban on mining in Karnataka and the transport and logistics’ bottlenecks in Goa. Karnataka has been facing a mining ban since August 2011 and the miners and steel companies are waiting for some urgent relief since this has hampered their production.

The operating margin of the company declined significantly by 2,800 bps to 22.9 per cent on a YoY basis. The lower operating margin was mainly on account of the increased export duty on iron ore by the regulatory bodies which was effective from Q1FY12. Also, lower volumes, high interest cost and foreign exchange losses impacted the profitability of the company. The hike in export duty largely impacted the company’s operating margins. With a further increase in export duty to 30 per cent effective December 30, we believe that the pressure on its EBITDA margins will continue to stay firm.

The realisation improved by 20 per cent YoY on the back of higher rupee depreciation, which has helped the company to maintain its iron ore prices during the quarter. However, going forward we don’t see much improvement in the realisations since there may not be any change in the iron ore grade in the coming quarter as also for the fact that the iron ore prices in the international market have come down significantly. This may put further pressure on the prices and realisation.

Moreover, there are lots of concerns which are currently hampering the mining sector. Karnataka’s mines are still under a ban and a hearing from the Supreme Court has been continuously deferred with no immediate respite. Further, a report by the M B Shah Commission on investigating illegal mining will most probably be released by March 2012 which can also raise concerns over the operations of the Goan mines. Also, the implementation of the new mining bill and revision of the royalty rates in August 2012 could impact the company’s sales volume in the coming quarter. Therefore, because of these uncertainties our advice to investors is to stay away from the scrip.

On the positive side, some relief is expected as in July this year the Central Empowered Committee has given its concurrence to a reclamation and rehabilitation plan for Sesa Goa’s mine in Chitradurga, Karnataka for a provisional annual permissible production capacity of 2.29 million tonnes. The approval of commencement of mining from the Supreme Court is still awaited.