New Delhi: The Mozambique mine newly acquired by a consortium led by Steel Authority of India Ltd (SAIL) is losing $35 for every tonne of coking coal it produces—or about a fifth of production cost—and analysts are sceptical about the state-owned steel maker’s claim that it will reach break-even in the next 18 months.

Production cost at the Benga mine comes to $165-166/tonne, compared with about $130/tonne it is able to realize from selling it, Anil Chaudhary, director of finance at SAIL, said in an investor conference call on Tuesday.

SAIL imports around 85% of its requirements of coking coal, a key input in steel production.

In late July, global miner Rio Tinto Plc entered into an agreement to sell the Benga mine and two other mining assets, Zambeze and Tete East, for just $50 million to a SAIL-led consortium called International Coal Ventures Pvt. Ltd (ICVL). Rio Tinto bought the mines in its $4 billion acquisition of Riversdale Mining in 2011.

The other partners in the consortium include National Mineral Development Corp. Ltd (NMDC) and Rashtriya Ispat Nigam Ltd (RINL). SAIL will hold a 48% stake in the mines while NMDC and RINL 26% each.

The deal to acquire the Mozambique mines is expected to be concluded over the next two months and the first shipment of coking coal from the Benga mines will reach Indian shores as early as December this year.

Chaudhary said the coking coal will only be consumed by SAIL and RINL, as NMDC has not yet started steel production. The consortium is expected to spend $700-800 million in the next five-seven years on developing the Mozambique coal mines.

Analysts say SAIL’S claim of being able to break even at the Benga mines over the next 18 months is ambitious, given infrastructure bottlenecks in Mozambique and low coking coal prices.

“It is not right to assume that the Mozambique government will invest in infrastructure to support ICVL’s operations. Also, commodity down cycles last for a while and coking coal prices could remain subdued for sometime to come," said Giriraj Daga, analyst at brokerage house Nirmal Bang Equities Pvt. Ltd.

Another mining analyst, who did not wish to be named, said Rio Tinto exited the mines partly because prices had fallen from a high of $330 per tonne in late 2011 to about $120-130/tonne now. The other reason is that there has been a management change in the company with a mandate to keep tabs on capital expenditure.

“However, the acquisition is a positive for SAIL over the longer term as it contributes to raw material security. Also, it has been purchased at the bottom of the cycle when the prices are attractive," the analyst added.

SAIL chairman C.S. Verma said that from the steel maker’s perspective, the acquisition is a good fit as the firm would always need coking coal for producing steel, irrespective of prices. Rio Tinto, on the other hand, is a trader and does not produce steel.

While the shipping costs of importing coking coal from Australia, the country’s main supplier, comes to around $30-35/tonne, in the case of Mozambique, the shipping costs will be just $12-13/tonne, Verma added.

SAIL and RINL are in the process of increasing their steel production capacity to 23 million tonnes per annum (mtpa) and 6.3 mtpa, respectively. NMDC is also in the process of setting up a 3 mtpa steel plant in Chattisgarh.

The Benga mine, around 40% of which is owned by Tata Steel Ltd, currently produces only 5 mtpa. Along with the Zambeze and Tete East assets, which are to be developed later, it has reserves of 2.6 billion tonnes. ICVL plans to ramp up production from the Benga mines to 12-13 mtpa in the next three years.

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