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SC allows iron ore mining in Goa with 20 mt annual cap (April)

The Supreme Court lifted an 18-month-old ban on mining in Goa on Monday, giving the iron-ore industry hopes of resuming an attractive export-led business, but analysts and industry members said a slump in prices and slackening demand in China meant the era of super profits is over. There is also some uncertainty as to how soon the Union environment ministry would issue clearances to the mines. In 2012, the ministry had kept in abeyance all clearances granted to mines in Goa. An environment ministry official said it would be possible to comment on the clearances only after his department had gone through the court order. In addition to the lifting of the court’s ban and a clearance from the Union environment ministry, mining requires the approval of the state government. The Goa state government is yet to lift its own ban on mining.

 

The Supreme Court, in its ruling, allowed resumption of iron ore mining in Goa with a cap of 20 million tonnes (mt) a year and said a court-appointed panel will submit an environment impact report after hearing a case on environmental degradation and illegal mining, Reuters reported. “The cap is less than half of the state’s original output and iron ore prices are also down compared to the earlier years, so the super profit cycle is over,” said Giriraj Daga, senior analyst at Nirmal Bang Equities Pvt Ltd. Daga added that although demand in China for Goa’s iron ore remained high, the loss of markets in the last two years would hurt exporters who once thrived on the heavy Chinese demand, particularly before and after the 2008 Beijing Olympics. China is home to the world’s largest steel industry.

 

Prices of iron ore fines with 62% iron content (comparable with Goa’s production) were at $113.3 per tonne on Monday at Tianjin port in China with freight, Bloomberg data showed, down 17.9% from a year ago. Analysts said prices are under pressure owing to a slowdown in Chinese demand, coupled with an oversupply of iron ore around the world. “Iron prices will stay low owing to overcapacities and shutdown of economically unviable and polluting units in China,” said Prakash Duvvuri, head of research at metal and mining information website OreTeam. “There are also liquidity issues in the steel sector and consolidation of units.” Goa is India’s third-largest iron ore mining state and produced about 45-47mt of the mineral prior to 2012, when the Supreme Court upheld a ban imposed by the state government after activists made allegations of environmental degradation and illegal mining.

 

The state has around 95 iron ore mines that produce iron ore fines (powdery iron ore), sold mostly in China where steel mills have the technology to mix Goa’s cheap, low-grade fines with expensive high grade ores from Australia and Brazil to create a cheap blend for their blast furnaces. Goan mines are some of the oldest in India—some date back to the 1960s—and the state is home to prominent miners such as the UK-based Vedanta Resources Plc’s Sesa Sterlite Ltd (erstwhile Sesa Goa Ltd), VM Salgaocar and Bro. Pvt. Ltd and Fomento Resources. An executive working at Sesa Sterlite said mining is unlikely to resume soon as government clearances could take months. In Karnataka, where the Supreme Court heard a similar case and lifted a ban in 2012 subject to a cap of 30mt per year, mining still hasn’t returned to normal. “The SC judgment is welcome news as the production will go up... but we feel that only one of the three locks have been opened,” the executive at Sesa Sterlite said, not wishing to be named. “The state government is yet to revoke its ban on mining and the environment ministry must give clearances to restart mining.” The ongoing general election and the monsoon season that is expected to start in June will also add to the delay, the executive said. Most mines shut down when the rains start. There are also concerns over how the court ruling would be enforced on the ground, an iron ore miner from Goa said. “There is confusion as the judge said that miners can’t mine on ‘deemed leases’,” said Haresh Melwani, chief executive of mining and exporting firm H.L. Nathurmal and Co. “Most of the miners have been operating on ‘deemed leases’ since 2007, not just in Goa but elsewhere too. Could this mean all mines in India must close?”  Sesa Sterlite said in a statement that it would work with the central and state governments to restart mining.

 

Other prominent miners of the state, along with representatives of their trade body, Goa Mineral Ore Exporters’ Association, said they would not like to comment without seeing the full order. An analyst said the impact of reopening mining will be more sentimental than financial on Sesa Sterlite, the largest private iron ore miner and the largest iron ore exporter in India. “We are factoring in iron ore production of 3mt by Sesa Sterlite in Goa this FY (as against 14mt production capacity prior to the ban). With this production, coupled with 2.3mt in Karnataka, we can expect a contribution from iron ore operations to consolidated Ebitda (earnings before interest, taxes, depreciation and amortization) of less than 1% this FY,” said Abhisar Jain, vice-president, institutional research, at Centrum Broking Pvt Ltd. “Looking at the small share of iron ore in Sesa Sterlite’s balance sheet, this reopening of mining by Supreme Court should not have a major impact on earnings and valuation though it is sentimentally positive.” According to Jain’s projections, in FY16 the total iron ore production of Sesa Sterlite (for Goa and Karnataka) could rise to 8.3mt (6mt in Goa), in which case the contribution of iron ore operations to Ebitda would rise to 2.5%. Sesa Sterlite closed at Rs.201.80 per share on Monday on the BSE, up 4.78% from its previous close and up 20.44% from August when the company was restructured.

 

The benchmark index Sensex closed at 22,764.83 points on Monday, up 0.6% from its previous close and up 26.7% from August. The metal index closed at 10,495.19 points, up 2.23% from the previous close and up 37.72% since August. Indian steel companies say they have little use for Goa’s fines as their blast furnaces can take only high-grade iron ore and because Goan mines are located far from most steel plants in eastern India. Goan miners say they get their best revenue from exports but that if Goan fines are pelletized (processed), they can be used by Indian steelmakers too. An activist seemed to suggest India had missed an opportunity to reform its mining laws. Chandra Bhushan, deputy director general at Centre for Science and Environment, said the court’s move is a repeat of what it did in the case of mines in Bellary, Karnataka. “We are considering mining issues case by case and state by state, whereas no major changes in policy are taking place.” “Institutions remain weak and even if the courts are giving good directions, once mines open, they will operate in the business-as-usual scenario till we reform our laws and institutions.” The Mines and Minerals Regulations and Development Act has remained unchanged since 1957, he said. The United Progressive Alliance tried to introduce a new version of the law in Parliament but couldn’t.

 

 

 

MINT, Delhi, Tuesday 22nd April 2014