Goa’s iron ore mining industry is the latest addition to the list of basic resource sectors to be hit by investigations into irregularities in their operations. Last week, the M.B. Shah commission’s report on Goa’s iron ore mining industry was tabled in Parliament. It lists several violations by miners and cites lapses by state and central government officials in enforcing regulations.

The fallout was swift. Goa’s government has suspended iron ore mining operations from 11 September. The government will scrutinize documents of existing leaseholders to ensure only valid licence holders are allowed to operate. Though mines can’t operate, companies can sell existing inventories after getting them inspected, a process that could mean some delay.

The government will study the commission’s recommendations for taking action. These recommendations range from the stopping of illegal mining, punishing negligent government officials, capping iron ore production, and even auctioning mining leases. Of these, capping iron ore production in Goa can have a severe impact on ore producers, including Sesa Goa Ltd, as the commission has recommended that mining be capped at 2000-01 levels or at 12.5 million tonnes per annum, or mtpa (against the current output of 65.7 mtpa).

The first issue to watch out for is how long the temporary suspension lasts. A few months’ closure should be easier to absorb, but a long delay will mean an adverse impact. The next factor to watch is which of the recommendations are accepted by the government, and whether they lead to a slap on the wrist, or cuts in iron ore output, or monetary penalties.

Sesa Goa’s share was down by 5.7% on Tuesday as a result of these developments. In 2011-12, it produced 12.7 mt in Goa and only 1 mt in Karnataka (affected by the mining ban). With Goa also suspended, that leaves it with no source for iron ore, till the temporary ban is lifted, or it gets the Supreme Court nod for resuming mining in Karnataka along with other Category-B mines in the state.

While the outlook for Goa’s iron ore miners looks bleak, a fall in ore output is also bad news for domestic steel producers. In 2011-12, for example, Sesa Goa’s domestic iron ore sales contributed to 19% of total volumes, compared with 10% in the previous year. A fall in Goa’s output could also affect steel producers that don’t have captive ore mines. If the news leads to international iron ore prices firming up, as India’s exports will fall significantly, steel producers may not only find it difficult to get ore, but also pay more for it.

NMDC Ltd is the only company that appears on top of the current situation. It is the only company allowed by the Supreme Court to mine iron ore in Karnataka. None of its iron ore mines are in Goa, and if domestic iron ore prices increase, its margins will anyway improve.

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