>TATA STEEL LIMITED (ICICI SECURITIES)

Tata Steel (TSL) has entered into a joint venture (JV) with New Millennium Capital (NML) and Labmag for developing direct shipping ore (DSO) project in Canada. A JV formation (hence profit participation) from an earlier scheduled SPV reflects increased visibility of mines to start operations. TSL has become NML’s largest shareholder with 19.9% stake. Upon completion of a feasibility study by NML for its DSO project, TSL has 180 days to acquire 80% equity in the project. Thereafter, the company is required to fund 100% of the project cost up to US$300mn. The mines have ~100mnte reserves, with 4mnte annualised production tailored to meet Corus’ requirements. Logistics infrastructure concerns could lead to delay in shipments versus management guidance of Q2CY11. Maintain BUY.

■ Reserves and resources. The DSO project contains 52.5mnte of proven and probable mineral reserves (~58.9% Fe), 3.5mnte measured and indicated mineral resources (~59% Fe), 5.8mnte of inferred resources (~55.8% Fe) and ~40mnte of historical resources that are not currently in compliance with NI 43-101.

■ Catered for Corus offtake. NML will produce sinter fines (SF) and pellet fines (PF), as per Corus’ requirements. SF will have minimum 64.5% Fe, with size less than 6mm (maximum 15% of 0.15mm). PF will form 10-15% of the production, with minimum 64.5% Fe and 0.075mm size. The fines are developed exclusively to meet Corus’ requirements (market price offtake).

Mining witnesses a spur

■ Cost profile – Comparison with Iron Ore Company of Canada. The management has guided for US$35/te FOB mining cost from DSO operations. We have compared DSO with Iron Ore Company of Canada (IOC). IOC sells ~77% of total iron ore as pellets, which dipped to 57% in H1CY09 due to reduced profitability. The average operational cost for IOC (past three years) is at US$50/te. With 43% concentrate production, costs have gone down to US$44/te in H1CY09. But NML will be exposed to higher logistics costs as IOC controls its own railway lines.

■ Logistics hangover could delay proceedings. Carriage of ore from Kivivic (section 4) and Timmings (sections 2 & 3) to ships-hold at Point Noire would involve three intermediate railways: i) Tshiuetin Railway (TSH) ─ 250Kms from Timmings to Emeril/Ross Bay Junction & owned by Naskapi Nation of Kawachikamach, ii) Quebec North Shore & Labrador Railway (QNS&L) ─ 350Kms from Emeril/Ross Bay junction to Arnaud sliding & owned by IOC and iii) Arnaud Railway ─ 30Kms long from Arnaud sliding to ships hold at Pointe Noire & owned by Wabush Mines. While resolution of TSH tariff was expected in Q3CY09, tariff proposals for other two lines were to be submitted in Q3CY09. In the absence of any company announcements, we presume that the proposals have been delayed.

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