Goa iron ore mining ban credit neutral for domestic steel companies; negative for pure iron ore players : India set to lose Rs 4000 crore in exports
The apex court's decision to ban iron ore mining in Goa effective from March 15 is seen as credit neutral for Vedanta Ltd and steel companies, but will be credit negative for pure iron ore players operating out of Goa. Experts believe Vedanta will see some impact on its revenues in the short to the medium term as India will lose nearly Rs 4000 crore or $600 million in exports. Read more:
It should be noted that on February 7, 2018, the Supreme Court of India cancelled the renewal of 88 iron ore mining leases in Goa which were granted in 2015. This move comes close on the heels of Odisha government suspending operations of seven iron ore mines after leaseholders failed to meet a deadline on December 31, fixed by the Supreme Court, for paying penalties for illegally extracting ore between 2000 and 2011. Odisha accounted for more than half of India’s total 192 million tonnes of iron ore produced in the fiscal year to March 2017. Between April and December, the state generated 78 million tonnes of iron ore, including 14.57 million tonnes produced by the seven mines that have now been shut down.
The ruling came on a plea filed by NGO Goa Foundation that stated the leases were illegal. The new licenses will require fresh environment clearance. The case dates back to 2012 when the Supreme Court cancelled all mining leases in Goa since their 50-year term lapsed in 2007. In August 2015, licences were renewed and given extension till 2020 under the “deemed” provision. A bench of Justices Madan B Lokur and Deepak Gupta, in their 101-page judgement, said the state government was obliged to grant fresh mining leases in accordance with law. The court however questioned the hastening of clearances and said the allocation of mines was made with only revenue considerations in mind. Hence the Court directed the Centre and the Goa government to grant fresh environmental clearances to them and asked the state to take necessary steps to grant fresh mining leases in accordance with the provisions of the Mines and Minerals Act, 1957.
Aniruddha Joshi, a former vice-president at Anil Agarwal-led Vedanta Ltd, said, "According to the Supreme Court's earlier judgement, the second renewal has to be taken for granted while the third will need technical permission necessary for the conservation of minerals. These miners were at second renewal stage so the whole plea that renewals have been done hurriedly is incorrect."
In a notification to the exchanges, Vedanta informed that its mines in Goa are impacted consequent to the Supreme Court order and that the company is currently assessing financial and operational impact of the judgement. In Goa, Vedanta has large mines in Codli and Sonshi regions along with pig iron facility with a captive power plant.
The total banned capacity in Goa stands at 20 million tonnes a year, of which Vedanta operates 5.5 MTPA. It is estimated that the miner stands to lose about $165 million, or about Rs 1,000 crore, in revenue. That’s about 1.4 percent of its Rs 71,721 crore turnover in FY17. Vedanta was also allocated 3 million tonnes additional capacity in Goa recently that it planned to use to produce higher quality ore. There is no clarity on the fate of this licence yet.
It is expected by analysts that India would lose nearly Rs 4,000 crore ($600 million) of export value with this ban given that the low-quality iron ore is shipped at about $30 a tonne.
Goa Mineral Ore Exporters' Association (GMOEA) has said in its letter to the chief minister of the state that the stoppage of iron ore mining in Goa will impact revenues worth Rs 34 billion (Rs 3400 crore). The letter dated February 12, said, "As the livelihood of several dependent segments would be affected due to ceasing of mining activities in the state, it would leave the stakeholders of the industry without any alternate source of income."
The letter also noted there is a threat of increase of non-performing assets (NPA) for banks as entities in the mining machinery, trucks etc will lose their earning potential thereby burdening financial institutions, it explained.
According to India Ratings Research, Goa produces largely low-grade iron ore, targeted for the Chinese market, while the domestic steel players predominantly use a higher grade material (above 60% ferrous content). About 80% of the Goan produce caters to export markets and the domestic sales are limited to steel players whose plants are closer to ports. Therefore, there will be no material impact on these steel players as Goan supplies form a small portion of their overall procurement.
However, pure iron ore exporters operating out of Goa may face headwinds even after re-acquiring the licenses, due to the global surplus of low-grade iron ore and China’s environment policy favouring metal production through intermediate products or high grade ore.
"Steady steel margins may also favour medium-to-high grade ore consumption over low grade. Indian miners may have to look for other countries to export low-grade iron ore. The Indian government removed the export duty on iron ore fines Fe<58% and iron ore lumps Fe<58% from 10% and 30%, respectively, in the Union Budget of 2016. The agency believes the additional capital outlay required for re-acquiring the mines may not be material, which is likely to be 0.5% of the 30% of the assessed value of the mineral and an equal amount of bank guarantee. However, the timelines for resumption of mining is difficult to assess as it depends on the auctioning process and fresh environmental approvals to be obtained. This may impact negatively the cash flows of pure iron ore players operating out of Goa," India Ratings Research said.
- TradeBriefs Bureau -