2011-12 was a landmark year in the Company''s journey towards its
vision, as it made significant strides towards becoming a diversified
global resource champion. Significant acquisitions a substantial
interest in oil & gas, an eco-friendly power generation facility for
domestic consumption and a major offshore iron ore asset and the
announcement of merger of Sterlite Industries (India) Limited, coupled
with the integration of varied commodity businesses, copper, zinc and
aluminium, herald a diversified natural resources company with a global
Diversity in commodities, exposure to diverse geographies and currency,
large scale operations and thereby access to significant organic
growth, are key success factors of global large diversified resource
majors, enabling them to deliver consistent higher
shareholder value at reduced risk.
The proposed Sesa Sterlite will be one among the largest global
diversified resource companies.
The Indian iron ore mining industry, in 2011-12, has been severely
affected by events related to regulation, policy and other
environmental concerns, which have also impacted our Company. Despite
all round best efforts put in by teams, the Company''s performance has
been under pressure as compared to the last year. Specifically, the
closure of Orissa operations by us since December 2010, the ban on
mining in Karnataka, and logistics constraints in Goa led to a decline
in overall volumes during the year, in comparison with previous years.
While, internal systems and processes continue to be robust absorbing
external shocks to reflect a creditable business performance, overall
performance has been impacted by the above constraints. Some other
adverse impacts were higher duties on the export of ore, increasing
interest costs and exchange losses. The impact was also felt by our
other businesses; the pig iron business recorded lower production and
consequently lower sales than last year, on account of low availability
of high grade iron ore from Karnataka.
During the year, the industry in India as a whole, as our Company, was
gripped in a seemingly ceaseless national debate on issues related to
illegal mining practices, which split over into all aspects of the
business. Heightened social activism led to holdups in regular
activities, resulting in increased levels of engagement with
stakeholders during the year, to reinforce and reiterate responsible
mining practices that are followed by our Company. The Company and its
teams worked tirelessly to mitigate the impacts, to ensure the
continuity of operations and to reassure our stakeholders; responding
proactively to all agencies.
The Company looks ahead to a hopeful early resolution of these
challenges. While we anticipate fair weather and a regulated climate
soon, we continue to work on furthering our internal systemic
robustness and strengthening processes to handle such future
challenges, if any, and gearing ourselves up towards our growth
Despite being under a shadow in the wake of the 2008 financial crisis,
the fiscal crisis in Europe and dimming growth prospects, the global
GDP is estimated to have expanded at a rate of 3.9% in 2011. China and
India exhibited moderate growth of around 9.2% and 7.2% in 2011
Despite the uncertainties on the economic front, global steel output in
2011 increased to 1.53 bt from 1.43 bt in 2010 and the global seaborne
iron ore trade increased from 986 mt in 2010 to 1,090 mt in 2011 (an
increase of 11%) on the back of sustained and robust demand from China.
The outlook for the Chinese economy and its metal consumption is
currently unclear as China transitions from an investment-led growth
economy to a consumption-led economy. While the demand growth for metal
consumption in China is expected to slow over the coming decade,
particularly on a higher base, longer term demand fundamentals for
metals remain robust. The absolute quantum of the Chinese demand growth
is expected to remain at healthy levels considering the base effect. To
put it into perspective, 10% growth in Chinese steel demand would
roughly add an equivalent of the entire annual Indian apparent steel
demand at current levels.
Extensive urbanisation of China over the last few decades has added
about 15 million persons to urban population every year and has been
the driver of the economic and social transformation in the country.
Despite this scale of urbanisation, it has been concentrated towards
the Eastern region of China. Overall levels of urbanisation in China
still remain at levels far below those of Brazil (87%), US (82%) and
Overall levels of urbanisation in China still remain at levels far
below those of Brazil (87%), US (82%) and Japan (68%).
The automobile penetration level, one of the major drivers of steel
demand elsewhere, is below the US level.
India''s consumption of world metals, in the last decade, still
constitutes only 3%, up from 2% in 1990s, despite growth seen in the
Indian economy. India''s per capita apparent steel consumption at 51 kg
remains far lower than China''s 454 kg and South Korea''s 1,082 kg per
capita consumption. Coupled with current levels of urbanisation (29%),
this is an indicator of a healthy long-term demand scenario.
Iron ore seaborne supply may continue to be tight for some years to
come. With limited additions, in a timely manner, in seaborne capacity
and with Chinese domestic iron ore production flattening, market looks
likely to remain tight in 2015. Cost inflation pressures and grade
depletion are structural challenges for the industry. Execution risk
around new projects means high-cost Chinese domestic ore will be needed
to balance the market for the next few years, setting a high floor to
Notwithstanding the multiple cost and regulatory pressures such as
multi-fold increases in the export duty, the strategic positioning of
Sesa as a low-cost producer, coupled with accessibility to ports and
strong customer relations, remains the key to mitigating downside risks
and exploiting opportunities.
Iron ore prices are expected to remain range-bound at current levels.
While the year-end prices remained at a level lower than those
experienced during the early part of the year, on an overall basis, the
average prices remain range-bound averaging similar levels as seen in
Sesa continues to focus on improving internal operational efficiencies,
while aspiring to achieve higher performance levels. However, during
the year, volumes were under pressure.
Iron ore production and sales were 13.8 and 16.0 mt in 2011-12 compared
to 18.8 and 18.1 mt (17.4 and 16.4 mt excluding Orissa) in the previous
year. External sales revenue from iron ore decreased by 3%, from Rs
8,387 crores in 2010-11 to Rs 8,112 crores in 2011-12.
The pig iron business'' sales volume decreased by 6% to 250,571 tonnes
in 2011-12, while sales revenue grew, fuelled by better prices, by 8%
to Rs 720 crores in 2011-12.
Sales and production volume of metallurgical (met) coke were at similar
levels as last year, at 251,264 tonnes and 256,575 tonnes respectively
in 2011-12. External sales revenue increased by 24% to Rs 200 crores in
Sesa''s net income from operations fell by 10% to Rs 8,310 crores in
2011-12. Operating cash profit (PBDT) declined by 43% to Rs 3,235
crores in 2011-12. PAT (including associate income) decreased 36% to Rs
2,696 crores, and diluted earnings per share were Rs 31.01 in 2011-12.
With effect from December 8, 2011, Cairn India Limited (CIL) became an
associate company and accordingly, the Company''s share of profits in
CIL, attributable to the period after acquisition till March 31, 2012,
have been recognised in the consolidated financial results.
Gross addition of over 257 mt over the last 4 years; drilling more than
Notwithstanding our disappointment of not being able to sustain the
continued strong performance levels in light of adverse extraneous
factors, our commitment and drive for growth was underscored by our
strong performance on resource addition. Exploration, which is the
pillar of strength for our growth strategy added 68 mt of additional
resources during the year, about 5 times what we have extracted during
I would like to congratulate our exploration team who through their
stupendous efforts have added over 257 mt over the last 4 years
drilling more than 200,000 metres. As on March 31, 2012, the Company''s
total reserves and resources in India were 374 mt, excluding resource
base at Liberia.
While we are currently constrained in our efforts to increase our iron
ore capacities, I am pleased to inform that we are on the verge of
successfully commissioning the expansions of our pig iron and met coke
facilities along with a sinter plant, while the associated power plant
is already commissioned. The enhanced pig iron capacity of 625 ktpa
makes us the largest low phosphorous pig iron facility in the country
and the addition of the sinter plant gives us the ability to utilise
iron ore fines, giving us a strong cost advantage.
Long Term Value
As stated earlier, we have taken significant steps towards the creation
of a global resource champion during the year.
Sesa Goa Limited, along with its subsidiary, Sesa Resources Limited,
acquired 20% of the share capital of Cairn India Limited for Rs 13,075
crores. Cairn India is a unique oil and gas exploration and production
platform with the second largest oil reserves in India. Its key
producing asset, representing 25% of India''s total oil production, has
been substantially de-risked.
It is a low operating cost, long life asset with the ability to
increase its production plateau and has a proven management team.
Taking the Company''s iron ore business truly global, we acquired 51%
stake in Western Cluster Limited in Liberia, with a potential iron ore
resource of over 1 bt, for Rs 411 crores. Western Cluster Project
presents an excellent opportunity for developing a large integrated
mining operation and establishes our presence in Liberia and the
upcoming iron ore hub in West Africa.
The Company also announced the intended merger of Sterlite Industries
(India) Limited with Sesa Goa Limited. This merger will foster the
creation of one of the world''s largest diversified natural resources
company and the merged entity will have exposure to zinc-lead-silver,
iron ore, oil & gas, copper, aluminium and commercial power with assets
located in India, Australia, Liberia, South Africa, Namibia, Ireland
and Sri Lanka.
Sesa remains committed to sustainable development, which focuses on
maintaining a pre- eminent position in health, safety and environment
practices, and in contributing to the development of communities where
Health and safety are always a priority for Sesa. The Company continues
to take a proactive role in providing employees a safe working
environment through responsibility, training, monitoring and
implementing the best safety practices across all locations.
Over the years, Sesa has been implementing a total quality approach to
its operations, and in this process, many units have been certified for
5S Workplace Management System.
In 2011-12, Sesa''s overall Lost Time Injury Frequency Rate (LTIFR)
reduced from 0.86 in 2010-11 to 0.81 per million man hours worked. I am
also happy to report that the pig iron division (PID) maintained its
zero-accident record for the last two years and our shipbuilding
division achieving a zero-accident record for
Our development initiatives have impacted about 4 lakh lives in and
around the areas in which we operate.
The Company has an integrated approach to the management of health,
safety and environment systems in all its units, which are certified
for ISO 9001:2008, ISO 14001: 2004 and OHSAS 18001:2007. During the
year, Sesa has been certified for SA 8000 for all its units on a
Our community development work, through the Sesa Community Development
Foundation, Mineral Foundation of Goa and other specific need-based
initiatives, continues to focus on social projects in line with our
overall sustainability objectives. Our development initiatives have
impacted about 4 lakh lives in and around the areas in which we
operate. Further details on health, safety and environment and
corporate social responsibility are outlined under the management
discussion and analysis.
As stated earlier, the longer term perspective of the iron ore market
remains stable with a gradual move towards equilibrium. Consensus
expectations indicate a global deficit in iron ore continuing for the
next two years, followed by pressure on prices as new mining capacities
are added. Cost pressures, especially related to capital expenditure,
uncertainty of imposition of fresh taxation by regulators and project
delays could potentially constrain the speed at which new supply is
added, which could be additional buoyancy for prices.
On the cost front, royalty rates, railway and road freight and export
duties are expected to exert pressure on the Company, while volumes
would continue to be challenged by uncertainties in policy decisions
and hurdles in logistics. We continue to remain cautiously optimistic
of overcoming such obstacles.
The following will continue to be our strategic thrust areas for the
Safety: Safety will continue to be paramount and at the forefront of
all our operations. Our focus in 2012-13 will be to improve on the
currently stellar safety performance in the pig iron and met coke
businesses by further reducing near misses and incidents, and to work
consistently and intensively to duplicate this performance in the iron
ore (and associated) divisions.
Production: With a focus on enhancing operational efficiencies, we will
continuously strive to restore performance levels to better the best
performance in previous years. We look forward to Karnataka operations
resuming to full-blown levels in the near term. The commissioning of
our met coke and pig iron expansions take our capacities to 560 and 625
ktpa respectively and we look forward to full capacity utilisation
rates during the year.
Cost Reduction and Process Optimisation: With increasing pressures from
external factors pushing costs up, we look forward to initiating newer
avenues to contain costs, with more and more technology interventions
to improve efficiencies, simplify processes and ease inflationary
People Best Practices: We will continue our focus on people
development, learning and other engagement initiatives towards making
our organisation an exemplary workplace.
Stakeholder Perception: Our resolve to partner with our communities
remains steadfast, as ever, and we are actively engaging with all
In 2009-10, Sesa was subjected to investigation by the Serious Fraud
Investigation Office (SFIO), Ministry of Corporate Affairs, New Delhi.
On May 26, 2011, the Company received a copy of the report by the SFIO
on the investigation into Sesa''s affairs pursuant to section 235 of the
Indian Companies Act. Certain allegations are made in the SFIO''s report
relating to under invoicing in iron ore exports, over-invoicing in coal
imports, higher commission to erstwhile principal shareholder Mitsui,
over-invoicing of iron ore to erstwhile subsidiary, Sesa Industries
Limited, and other violations under the Indian Companies Act, during
the period from 2001 to 2008. The report has recommended, inter alia,
that action be taken against the directors of Sesa Goa Limited during
the aforementioned period.
In response to the report received from SFIO, Sesa filed a few
representations to the Secretary, Ministry of Corporate Affairs, with a
copy to the SFIO, explaining in detail Sesa''s position on the
allegations in the SFIO report and denying the allegations made
therein. No further communication has been received till the time of
I would like to take this opportunity to thank all our employees, my
colleagues on the executive team of Sesa, the Group Management and the
Board of Directors for their unwavering support and would like to use
the opportunity to welcome our colleagues in Western Cluster Limited,
Liberia and GEPL into our family.
We announced that Mr. A K Rai, Executive Director has retired from the
Board with effect from August 1, 2011, after serving the Company for 36
years. Further, Mr. P G Kakodkar, Non-Executive Director, also stepped
down from the Board with effect from October 25, 2011. On behalf of the
Board of Directors, I would like to take this opportunity to thank Mr.
Rai and Mr. Kakodkar for their substantial contributions to Sesa.
I thank our shareholders for reposing faith in our business in adverse
times. These are tough times and call for tougher people. Let me
reassure our shareholders that we are geared up to face challenges as
they arise and that we shall all exert our efforts together, exercise
our individual talent and team synergies, to propel our Company forward
and deliver the goals we have set ourselves for this year.
P. K. Mukherjee
May 7, 2012