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Sesa Goa faces uncertain ore prices

Sesa Goa faces uncertain ore prices
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First Published: Tue, Jul 20 2010. 09 43 PM IST

Updated: Tue, Jul 20 2010. 09 43 PM IST
Iron ore mining company Sesa Goa Ltd has been unable to capitalize on the sharp rise in iron ore prices, due to external factors. In the June quarter, though realizations improved dramatically from a year ago, slower growth in despatches affected its performance. On an organic basis, Sesa Goa’s volumes fell year-on-year (y-o-y). But thanks to the Dempo acquisition, volumes rose 14% to 5.4 million tonnes (mt). The acquisition contributed to 1.2 mt of this. Volumes were lower than the 7.4 mt it sold in the March quarter.
As pointed out earlier, this is due to external factors. In Goa, strict controls on the shipment of iron ore fines from mid-May affected shipments. The company’s operations in Karnataka faced bigger problems, with the controversy over illegal mining making life difficult for iron ore producers. Obtaining permits and delays in transportation due to checks have affected exports. In Orissa too, stricter controls and procedural delays are affecting Sesa Goa’s despatches. Operations in Karnataka and Orissa have been suffering for a few quarters now.
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Despite these setbacks, the company’s results were protected by higher realizations, which doubled y-o-y and were up by around 40% over the previous quarter. Sales rose 140% to Rs2,394 crore in the June quarter, while net profit tripled, over the year-ago period. On a sequential basis, revenue was flat despite a 27% drop in volumes, while net profit rose 7.4%, primarily due to higher other income and lower income tax.
Sesa Goa’s costs on railway freight, export duties and royalty rates have risen. As a result, its operating profit margin fell by around 2 percentage points sequentially, though it gained by 16 percentage points over the year-ago period, thanks to the sharp increase in realizations.
The uncertain operating environment is a key concern. Apart from existing operations, expansion projects, too, depend on getting the requisite clearances in time. The company is confident that its operations in Karnataka and Orissa will return to normalcy in the current year and has reported some improvement in Karnataka in July. Sesa Goa is maintaining its volume growth projection of 20-25% for the current fiscal.
Meanwhile, the iron ore price scenario has turned uncertain. Worries about slower demand from the Organisation for Economic Co-operation and Development (OECD) and Chinese markets have seen iron ore fine prices fall 40% since end-April. On a y-o-y basis, prices are still about 40% higher.
Even if Sesa Goa delivers on the 20-25% volume growth it has projected, earnings estimates would have to be curtailed if iron ore prices continue to correct. Higher duties on iron ore export are another threat. At current levels of profitability—Sesa’s average realization was $84 (Rs3,956) per tonne against a cost of $25 per tonne—there’s enough headroom for the company. But investors will focus on iron ore prices, given its huge influence on Sesa’s share price. The company’s shares have already corrected by 28% from its highs in April.
Graphic by Yogesh Kumar/Mint
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First Published: Tue, Jul 20 2010. 09 43 PM IST