“Iron ore supply from NMDC stopped; JSW steel to get aggressive during e-auctions: With the Supreme Court direction that NMDC’s production in Karnataka be e-auctioned, bypassing its long term contracts with domestic steel players, iron ore supply from NMDC to JSW Steel has stopped. This has reduced the
availability of iron ore for JSW Steel and led to its decision to cut production to 30% of capacity from around 70%. JSW Steel’s iron ore procurement costs would increase as the current scarcity of iron ore on account of the ban on iron ore mining in Karnataka is likely to result in aggressive bidding up of iron ore prices when the NMDC iron ore comes up for e-auction. JSW Steel has also been sourcing iron ore from NMDC Chhatisgarh, which will entail higher iron ore costs due to high freight costs. However, JSW Steel has procured ~1.8kt of iron ore from three rounds of e-auction of iron ore totalling close to ~3.5mn tonnes from the total inventory of 25mn tonnes to be eauctioned in Karnataka. As soon as JSW Steel receives delivery of the above iron ore, we expect JSW Steel to ramp up its production from the current capacity utilisation of 30% to 60-70% levels. Given its current predicament, JSW Steel is likely to continue to bid aggressively and especially target the low grade iron ore from the e-auctions as it has iron ore processing facilities. Low grade iron ore is expected to be more than 50% of the inventory.”
“The Environmental Impact Assessment (EIA) report on mining in Karnataka is expected to be submitted sometime in November, which will determine whether iron ore miners would be allowed to resume production in Karnataka. There is a good possibility that those iron ore mines, which had been operating legally, could be allowed to operate with the provision that the produce would be eauctioned. JSW Steel could be allowed to operate its captive iron ore mine which would be positive for it. JSW Steel produces about 2mn tonnes of iron ore annually from its captive mine. The Lok Ayukta report on illegal mining in Karnataka had alleged that JSW Steel had received 1.297mn tonnes of iron ore by way of truck overloading between April 2009 to June 2010, and that no royalty had been paid on such. In our last update dated 4th August, 2011, we had commented that the matter was of not material significance. Even if we were to assume the allegation to be true, JSW Steel’s liability, assuming a royalty rate of Rs 100-200, would amount to Rs 130-Rs 260mn, which is just ~0.1%-0.2% of its market cap. In view of the iron ore supply from NMDC being stopped, we lower our volume assumptions and increase our iron ore cost assumptions for FY12E and FY13E. We lower our steel sales volume assumptions by 14.3% and 8% for FY12E and FY13E to 6.9mn tonnes and 8.7mn tonnes respectively, and increase our average iron ore cost assumptions by Rs 284per tonne and Rs 273per tonne for FY12E and FY13E to Rs 3701per tonne and Rs 3301per tonne respectively. We, thus, lower our consolidated EPS estimates for FY12E and FY13E by 29% and 22.7% to Rs 47.9 and Rs 83.0 respectively.”
“On P/B valuation metric, JSW Steel looks cheap at 0.8x FY11 numbers and 0.7x FY13E. We value JSW Steel (ex-Ispat Industries) at a consolidated 5x EV/EBITDA, which gives a value of Rs 625.8. To this, we add the value of its investment in Ispat Industries at 0.8x the equity investment, which translates into a value of Rs 77.7. Our fair value for JSW Steel comes at Rs 704. We cut our target price per share for JSW Steel by 23.2% to Rs 704 from Rs 916, implying a potential return of ~24.6% from the last closing price. We believe that the recent steep fall in stock price presents an opportunity for long term investors. We maintain our BUY rating on JSW Steel,” says Aditya Birla Money research report.
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availability of iron ore for JSW Steel and led to its decision to cut production to 30% of capacity from around 70%. JSW Steel’s iron ore procurement costs would increase as the current scarcity of iron ore on account of the ban on iron ore mining in Karnataka is likely to result in aggressive bidding up of iron ore prices when the NMDC iron ore comes up for e-auction. JSW Steel has also been sourcing iron ore from NMDC Chhatisgarh, which will entail higher iron ore costs due to high freight costs. However, JSW Steel has procured ~1.8kt of iron ore from three rounds of e-auction of iron ore totalling close to ~3.5mn tonnes from the total inventory of 25mn tonnes to be eauctioned in Karnataka. As soon as JSW Steel receives delivery of the above iron ore, we expect JSW Steel to ramp up its production from the current capacity utilisation of 30% to 60-70% levels. Given its current predicament, JSW Steel is likely to continue to bid aggressively and especially target the low grade iron ore from the e-auctions as it has iron ore processing facilities. Low grade iron ore is expected to be more than 50% of the inventory.”
“The Environmental Impact Assessment (EIA) report on mining in Karnataka is expected to be submitted sometime in November, which will determine whether iron ore miners would be allowed to resume production in Karnataka. There is a good possibility that those iron ore mines, which had been operating legally, could be allowed to operate with the provision that the produce would be eauctioned. JSW Steel could be allowed to operate its captive iron ore mine which would be positive for it. JSW Steel produces about 2mn tonnes of iron ore annually from its captive mine. The Lok Ayukta report on illegal mining in Karnataka had alleged that JSW Steel had received 1.297mn tonnes of iron ore by way of truck overloading between April 2009 to June 2010, and that no royalty had been paid on such. In our last update dated 4th August, 2011, we had commented that the matter was of not material significance. Even if we were to assume the allegation to be true, JSW Steel’s liability, assuming a royalty rate of Rs 100-200, would amount to Rs 130-Rs 260mn, which is just ~0.1%-0.2% of its market cap. In view of the iron ore supply from NMDC being stopped, we lower our volume assumptions and increase our iron ore cost assumptions for FY12E and FY13E. We lower our steel sales volume assumptions by 14.3% and 8% for FY12E and FY13E to 6.9mn tonnes and 8.7mn tonnes respectively, and increase our average iron ore cost assumptions by Rs 284per tonne and Rs 273per tonne for FY12E and FY13E to Rs 3701per tonne and Rs 3301per tonne respectively. We, thus, lower our consolidated EPS estimates for FY12E and FY13E by 29% and 22.7% to Rs 47.9 and Rs 83.0 respectively.”
“On P/B valuation metric, JSW Steel looks cheap at 0.8x FY11 numbers and 0.7x FY13E. We value JSW Steel (ex-Ispat Industries) at a consolidated 5x EV/EBITDA, which gives a value of Rs 625.8. To this, we add the value of its investment in Ispat Industries at 0.8x the equity investment, which translates into a value of Rs 77.7. Our fair value for JSW Steel comes at Rs 704. We cut our target price per share for JSW Steel by 23.2% to Rs 704 from Rs 916, implying a potential return of ~24.6% from the last closing price. We believe that the recent steep fall in stock price presents an opportunity for long term investors. We maintain our BUY rating on JSW Steel,” says Aditya Birla Money research report.
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