Sunday, September 9, 2012

>INDIA MINING: SC allows mining in Category A Mines

 Iron ore mining allowed in Category A mines: As per media reports (Bloomberg, CNBC), Supreme Court allowed conditional resumption of mining in 18 iron ore leases in Karnataka. These mines are part of the Category A mines as per the CEC report (included 21 leases in CategoryA). While the court order is not available as yet, media reports (Bloomberg) indicate that the companies have to implement the R&R (rehabilitation and reclamation) plan as approved by CEC and all lease holders must get the necessary forest and environmental clearances. The companies are also required to get pollution clearance certificate and submit an undertaking that no mining laws would be flouted.

 While restart of production provides some relief, ramp up of production may take time: The restart of production in Category A mines was much needed given the declining stockpile and poor quality of ore in e-auction. As per media reports (Bloomberg), these 18 mining leases can produce ~7MT. JSW Steel had indicated that ramp up of production could take 3-6months, which in our view depends on the time taken to get necessary approvals. The production from Category A mines and the NMDC production (currently at 7-8MTPA production runrate) should help ease the iron ore availability in Karnataka but ramp up to full production remains key. The focus now shifts to the Category B mines, which are bulk of the mines in the state.

 Positive for JSW Steel but unlikely to lead to lower costs: We believe iron ore production and hence availability is likely to increase in over the next few months for the state’s steel makers (including JSW) and also the sponge iron producers. But as the ore will continue to be sold through the auction route, we do not expect a material reduction in iron ore costs. The restart of production in Category A mines will help improve utilization at JSTL's Vijayanagar plant, which is currently operating at 74% level (as per July data). The company had indicated that while eauction prices continue to remain high, the quality of ore being auctioned has deteriorated, therefore increasing the iron ore requirement. Sesa’s Karnataka mines are part of the Category B mines and therefore, not impacted by the order.

 A small step but is it enough? The current production level at NMDC and Category A mines will provide 15-16MTPA. The total iron ore production (last 3 year’s average) in Category B mines was 19.4MT, but approved production could be lower. JSW's own steel capacity in Karnataka stands at ~10MT (implying 16MT requirement at full utilization). Even assuming full 25MT iron ore production in Karnataka, we do not see exports starting anytime soon, unless the steel mills do not pick up the iron ore.

To read report in detail: INDIA MINING