JSW Steel Ltd has formed a team to acquire iron ore and coal mines as it looks to increase self-sufficiency in feeding the Sajjan Jindal-owned group’s steel and power plants, but analysts say this may not be an easy task.
“As we expand aggressively, we need to own mines to bring down costs,” said Seshagiri Rao, joint managing director, JSW Steel, and chief financial officer of the JSW group.
JSW Steel, which announced the purchase of debt-laden steel maker Ispat Industries Ltd last year for Rs 2,157 crore, sources 40% iron ore from its own mines to feed its 14 million tonnes (mt) steel plants in Karnataka and Maharashtra.
“Iron ore mines in Chile will be expanded to 5 mt from 3 mt now. We have a target to achieve 100% self-sufficiency in five years,” Rao said.
The seven-member acquisition team, headed by executive director, mergers and acquisitions, Murari Rajan, will identify targets, after which a nine-member technical team will assess their suitability.
Iron ore costs account for 15-16% of the overall cost of steel production, while coking coal accounts for 40%.
Coking coal prices have risen from $190 per tonne last year to $350 per tonne in the second quarter of this year. Iron ore prices are around $170 per tonne, up 15.63% from $147.2 a year ago.
“To move towards 100% (self-sufficiency) in iron ore is a difficult proposition, considering the high asset price (of acquiring mines) and availability of no major assets,” said Rakesh Arora, managing director and head of research, India, at brokerage Macquarie Capital Securities (India) Pvt. Ltd.
In July, the company will begin mining coal from West Virginia in the US and expand it to 3 mt in three years. “We are looking at at least 50% self-sufficiency in coking coal,” Rao said.
The group’s power arm, JSW Energy Ltd, has a current operational capacity of 1,730 megawatts (MW).
The company plans to build a 1,100MW lignite-fired power plants and an additional 2,000MW using coal as feedstock.
“For this, around 7-8 mt of coal is required, whereas we have around 4 mt from coal mines in South Africa and by sourcing coal through long-term agreements from miners,” said Rao.
The company’s consolidated debt stands at Rs 16,400 crore, but a Rs 5,800 crore equity infusion from Japanese partner JFE Holdings Inc. and Sajjan Jindal has lowered its debt-to-equity ratio, making it easier to raise more debt for funding acquisitions and expansions.
JFE invested Rs 4,800 crore in July to purchase a 14.99% stake in the company, while promoters have committed another Rs 2,100 crore. Cash flows from operations should take care of the debt, Rao said.
Following the JFE investment, the company’s debt-to-equity ratio went down to 0.9 on 31 March, an analyst at a domestic brokerage said.
The analyst, who did not want to be named, agreed with Rao that cash flows from operations should be enough to retire debt. JSW’s operating profit, or earnings before interest, taxes, depreciation and amortization (Ebitda), is estimated to be around Rs 7,000 crore for the current fiscal year and interest costs are Rs 1,300-1,400 crore, the analyst said.
Unlike rival Tata Steel Ltd, which purchased the UK’s Corus, JSW Steel is betting on domestic steel maker Ispat and plans to expand its capacity in Karnataka and West Bengal.
Three months after the acquisition, Ispat reported a net profit of Rs 70.18 crore for the quarter ended 31 March, after a loss of Rs 409.31 crore for the quarter ended 31 December, as the company did away with importing pellets and coke. It procured iron ore from Bellary in Karnataka instead of Orissa, increased the local sales market in Maharashtra, and sourced pellets and coke from local suppliers.
“This gave us an increase in margins of Rs 4,000-5,000 for every tonne of steel,” Rao said. “Ispat produced 670,000 tonnes for the quarter ended 31 March against 243,000 tonnes in the previous quarter.”
The second phase of Ispat’s transformation involves building a 300MW power plant and expanding coke oven capacity by over 3 mt. “We will try to build these new plants on our own,” Rao said.
Building capacities in India is a better approach, said Macquarie’s Arora. Although the steel industry is going through tough times, he said, demand is bound to grow with some push to the infrastructure side.