Mumbai: JSW Steel Ltd is in talks with six-seven iron ore miners in Karnataka for purchasing stakes in its quest for raw material security, and could seal deals in about a year, a top company official said on Tuesday.
“We are in talks with six-seven mines. They want to have a joint venture or partnership of some sort,” said Vinod Nowal, deputy managing director of JSW Steel. “In the next six months to one year, it could materialize.”
JSW has India’s second largest domestic steel capacity at 14.3 million tonnes with plants in Karnataka, Maharashtra and Tamil Nadu. Yet, it does not have any iron ore mines, which has given it periodic problems, as the supply of the key steel-making ingredient has shrunk owing to regulatory and legal crackdown on illegal mining.
Captive iron ore supply could help JSW Steel lower its cost of production in a big way, analysts have said.
Nowal said all of the potential selling parties are from the A and B category of mines in Karnataka, as segregated by the Supreme Court during the course of hearing a two-year environment and illegal mining case that ended in April.
The Supreme Court allowed the A and B category mines, comprising more than 100 mines, to reopen after a ban at the time when the case was being heard.
People in the metal and mining industry say that many of the mines are unable to restart their operations due to myriad problems such as expired leases and lack of funds.
An analyst hailed JSW’s moves to scout for captive mines.
“It will be a buyers’ market and JSW will emerge a key beneficiary,” said Ritesh Shah, metal and mining analyst at Espirito Santo Securities India Pvt. Ltd. “JSW is equipped with beneficiation/sintering facilities and hence has the technical capability to utilize (even) sub-grade ore.”
To produce 10 million tonnes (mt) of steel, JSW steel needs 18mt of iron ore.
Nowal said many offers for mine purchases overseas are paused owing to currency market fluctuations and other reasons. “We are waiting and watching. There is not a sizable progress on this front,” he said.
In May, Nowal had said the company had 50 proposals for buying assets from around the world from miners who were putting their assets on the block owing to the fall in profit margins on the back of the softer metal prices.
In India the company is eyeing other iron ore blocks that could come from the more than 30 applications filed to the Karnataka government for mining blocks.
“We are expecting 4-5 of those to fructify,” Nowal said without giving a time frame.
Plus the company wants to bid for the C category of mines that are to be auctioned as per the Supreme Court’s order, he added.
“We think JSW Steel will be a key contender for category C leases (5.3 mt in all) and we won’t rule away any inorganic corporate action on this front as well,” Espirito Santo’s Shah said.
An investment banker said any acquisition by JSW will have to be financed as the company does not have much cash.
Data from Bloomberg shows JSW had free cash flows of minus Rs.1,251.11 crore as of March 2013 and a debt of Rs.30,425 crore. Its debt is 1.2 times its equity.
“It may not have difficulty raising cash because it is a credible company and is growing,” the investment banker, not wishing to be named, said.
Many of the mines in Karnataka are midsized with capacities of a few million tonnes and there are no benchmarks for a fair valuation.
A pellet plant of UK’s Stemcor Holdings Ltd in India coupled with a stake in an iron ore mine in Odisha has been valued at $1 billion.
Shares of JSW Steel ended Wednesday at Rs.848.20 each on BSE, down 1.49% from their previous close, while the BSE Metal index ended at 9,019.70 points, up 0.04%.
Compared to last year, JSW’s shares are up 15.42% while the BSE Metal index is down 10.06%.