While it bid aggressively for mines in Karnataka, the strategy has changed for Odisha mines
Taking cognisance of the slowing demand and subdued prices in the sector, JSW Steel has decided to go conservative on its push to acquire iron ore mines and thereby conserve cash.
While the country's leading steelmaker had been aggressively acquiring iron ore mines in Karnataka, where its Vijaynagar facility is situated, JSW Steel will take a more moderate view when mining leases come up for auction later this month in Odisha.
Sources told Moneycontrol that the Odisha government may put to block about 45 mines iron ore mines whose leases will expire in 2020. These mines will have a total reserve of about 570 million tons.
"In Karnataka, we had bid up to 125 percent of the base prices. But in Odisha, the factors are different. While we are interested in the mines, we won't offer a premium of more than 30 percent," a senior official from the steel company told Moneycontrol.
The company had earlier this year opened its fourth iron ore mine in Karnataka. "This will add another 1.2 million tons of iron ore this year," its Jt Managing Director and Group CFO Seshagiri Rao, had said. Overall, 5 million tons of iron ore will come from the four mines.
The company is close to acquiring another three iron ore mines in the state. "These mines have reserves of 93 million tons, and will add another 2.5 million tons to annual iron ore production," Rao had said. These mines will meet 35 percent of the company's annual iron ore needs this financial year.
While the company wants to acquire more mines and become more self-sufficient in the raw material requirement, it won't come at the cost of margins, especially in the current economic circumstances.
JSW Steel's net profit fell 51 percent in the first quarter of the financial year. The slowdown has seen its inventories building up, and it was at 1.2 million tons, up 3 lakh tons from a year ago, in the first quarter. Its finished goods inventory increased to 25 days, from the otherwise 20 days.
"In such a situation we don't want to bid aggressively, as that would impact our margins," said the executive quoted above.
The company had bid high for the mines in Karnataka, as the cost of transportation of the raw material to the plant was low. "These mines are close to our facility," said the executive.
But the factors differ in Odisha. Mines in the state are much bigger - with a minimum deposit of five million tons - and this needs higher capex to develop them. "Also, the cost of transportation will be high. We will have to take the ores to our facilities in Karnataka and Maharashtra," said the executive.
The company is doubling the capacity of its unit in Dolvi, in Maharashtra, to 10 million tons a year, increasing its need for the raw material.
Also, the state administration requires mines producing more than 5 million tons of ore a year, to set up a slurry pipeline or railway siding or conveyor to transport the raw material. "This calls for not only huge capital investment," said the official.
Another requirement of the Odisha government asks miners to produce at least 80 percent production of the rated mine capacity even if there is no market demand. This, say, industry officials, will again add to the costs.
Interestingly, the mining lobby continues to push for another round of extension of the leases. Demand for extension ranges from three to 10 years.
"Previously, the extension was given for two years. And this lapses in March 2020. The mining lobby has been putting pressure for more," said a source from the industry.If that doesn't work, added the source, the miners are pushing for a higher base price for the mines to be auctioned. "This will help reduce competition," said the executive.Subscribe to Moneycontrol Pro and gain access to curated markets data, trading recommendations, equity analysis, investment ideas, insights from market gurus and much more. Get Moneycontrol PRO for 1 year at price of 3 months at 289. Use code FREEDOM.