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Sesa Goa kills two birds with one stone

Sesa Goa kills two birds with one stone
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First Published: Tue, Mar 22 2011. 11 05 PM IST
Sesa Goa Ltd’s acquisition of Bellary Steels and Alloys Ltd’s steel plant adds a full-fledged steel business on top of its iron ore operations. It may benefit on two counts from this acquisition. It can silence critics who accuse ore producers of exporting a precious mineral resource, without adding value. And, it adds an element of vertical integration to its iron ore business.
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Sesa Goa has paid Rs 220 crore to acquire the under-construction integrated steel plant, and 700 acres of land in the iron ore-rich state of Karnataka. Sesa Goa already runs a pig iron ore operation in Goa. This was till recently under Sesa Industries Ltd, a subsidiary, which has since merged with Sesa Goa. An expansion project for pig iron is under way and is to be commissioned in the third quarter of fiscal 2012.
But Bellary’s integrated steel project will be Sesa Goa’s major foray into steel-making. Sesa Goa is assessing how soon it can commission this project. It may need to make further investments for the same, as this plant has been under construction for years now. Its initial capacity was to make 500,000 tonnes of steel in the form of wires and rods, with a 130 megawatt captive power plant. The plant’s capacity could be expanded to 2 million tonnes (mt), if needed, by adding additional equipment. However, that will require significant investments. Producing a tonne of steel requires about 1.75 tonnes of iron ore, as a thumb rule. Sesa Goa could then potentially use iron ore in the range of 875,000 tonnes at its initial capacity to 3.5 mt, if it expands to 2 mt.
Sesa Goa has an important choice to make, of keeping its steel business as a small part of its operations, or making it much larger. The choice will have implications on its balance sheet and profitability. The steel business needs far more significant investments compared with the mining business. In the current operating environment, margins are also higher for iron ore producers. Sesa Goa’s iron ore business earned a segment profit margin of 56% in the nine months ended December. Tata Steel Ltd’s stand-alone steel business (which uses captive iron ore) earned a segment margin of about 36%. And, this is in spite of it being one of the lowest-cost producers of steel, with economies of scale, and a value-added product portfolio comprising flat and long products.
Sesa Goa’s stock rose 1.5% to Rs 262.80 on Tuesday. The acquired plant will not come on stream immediately. A near-term trigger to watch out for, though, is whether the ban on iron ore exports from Karnataka is eventually lifted.
Graphic by Sandeep Bhatnagar/Mint
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First Published: Tue, Mar 22 2011. 11 05 PM IST