JSW Steel denies illegal mining claim; will assist in probe

Seshagiri Rao, joint managing director and group CFO of JSW Steel tells CNBC-TV18 that all allegations of illegal iron ore mining in Karnataka have no merit and that the company will cooperate 100% with all investigating authorities.“JSW Steel is, in fact, the victim of alleged illegal mining,” he said.

Last Friday, the Supreme Court ordered a probe against former Karnataka chief minister BS Yeddyurappa and the steel maker firm saying it had procured illegally mined ore.

Also Read: Illegal mining case: CBI raids Yeddyurappa's residence

The company reported a 10% fall in quarterly net profit, beating expectations, and said it expected to operate its main plant at 80% capacity in 2012-13 as iron ore supplies take time to stabilise.

JSW Steel, with a production of 7.43 million tonne of crude steel in 2011-12, has been beset by problems with its flagship plant in Karnataka facing iron ore shortages since the illegal mining issues came to light and the Supreme Court banned mining in the state by all private miners last year.

On its acquisition - JSW Ispat, Rao says that in spite of several constraints such as the unavailability of gas and iron ore, there is a good turnaround and the company is showing Rs 294 crore of EBITDA in the last quarter.

Below is an edited transcript. Watch the accompanying video for more.

Q: Could you just explain for your investors where things stand in terms of that CBI probe that seemed to indicate there would be a probe both against Yeddyurappa, but also that there was a nexus between JSW Steel and the former minister?

A: No, we have clarified on this issue that JSW Steel has not done anything wrong. In fact, we are the victims. We have been suffering over the lack of iron ore and iron ore mining concessions where we have made large investments in the state of Karnataka. So Anyhow, if there is any investigation we will fully cooperate and we will provide all the details that are required.

Q: Is there a legal process that one needs to be told about? How are you following up on that investigation?

A: The Supreme Court I understand has asked CBI to investigate several other issues including a part of this issue. We are expecting that they will ask some details. As and when those details are asked we will provide those details. I would like to clarify to all the viewers that JSW has not done anything wrong. We are on the right side of law. Therefore, I don’t think there is anything we need to be concerned about.

Q: Coming to your numbers, JSW Ispat - the acquisition that you made a while back, its numbers are not improving too much. By when can you expect any meaningful upturn because they continue to drag your consolidated performance?

A: Before JSW took over this company, it was making an EBITDA loss of Rs 77 crore, so after we took over there is a good turnaround in the company in spite of several constraints which are external, like gas and iron ore being not available. There are several other constraints but in spite of that, the company could show Rs 294 crore of EBITDA in the last quarter. There is a very good improvement relative to what it was prior to the takeover.

We have taken certain short-term measures and also the long-term measures. This company can stand on its own once integration is complete. We have taken steps to setup palletization plant, coke oven battery and also the power plant and several other improvements for efficiency improvements. All this will come in operation in the next 18-24 months time. Then this company can stand on its own. During this period, you will find a huge improvement relative to what it was earlier. We have refinanced the entire debt. It has come outside CDR. Interest cost has come down and our operational parameters are improving. That way you would find a huge improvement here.

Q: It has a negative net worth at this point though, does it not? All indications are you would need some kind of equity infusion in order to fund those debt covenants. Is that something you will have to look at over the next few months?

A: Yes, it lost its negative net worth as on March 31, 2012. The company is working out various alternatives as to what is required to be done in order to shore up the net worth.

Q: On the core issue of availability of iron ore and being able to access the iron ore mines in Karnataka. What is your own understanding of the Supreme Court’s recommendation? What did you takeaway from in principle approval, restart certain mines? What would that mean in terms of iron ore availability for you?

A: The ban on iron ore mining happened in the State of Karnataka in July 2011. For the last eight-nine months, if you see the developments, as and when there is an issue in availability of iron ore for running the plants within Karnataka there has been relief. Either permitting NMDC to mine 1 million tonne per annum and supply to the industry and there are no exports and selling iron ore over the stock piles. So these give hope that things will improve in the months to come.

But as on date if I see there is almost close to 2 million tonne of iron ore which has already been auctioned yet to come to the plant and there is stock of almost close to 3 million tonne which is yet to be auctioned and every month NMDC is mining almost close to 6-7 lakh tonne. So that is available for re-auction. Taking this into account, up to July there is clear visibility. Already CEC has submitted their recommendations for opening of the mines, Category A and Category B. Honorable Supreme Court has permitted opening of Category A mines, subject to certain conditions which we hope gets fulfilled.

So in the next few months, the Category A, Category B mines will be opened up with NMDC ramping up production and advance auctions which also will be permitted as per the recommendation of CEC. Then I hope, gradually in the next few months, the situation will improve from the current constraints which we have. That will ease out the situation in improving the production within the plant.

Q: Your interest cost shot up to Rs 367 crore in the current quarter. What are you doing about it? Any plans of bringing down debt of pairing this interest cost?

A: This also has to be looked at in context. For instance, we have commissioned a 3.2 million tonne expansion in the last year, in July 2011 and at the same time we have commissioned our 300 megawatt power plant in the month of March 2012. We have also commissioned certain improvement projects during the year. So there is close to Rs 8,000 crore of capitalisation of new projects in the last year. So the debt belonging to that particular expansion and that interest also has come to P&L.

Also there is Schedule VI changes which have happened, where instead of showing gross interest, net interest is shown as other income. The interest income is shown as other income. That also has shown a higher number in interest cost in absolute number. But if you see, debt equity is very relevant here. Debt equity of the company on a consolidated basis is 0.97:1. If you see our weighted average cost of debt is around 7.3%. So overall our interest costs are quite competitive in terms of interest cost.

Here when we have 11 million tonne installed capacity, when we are operating at 75-80% it appears to be little bit on the higher side in absolute number. Once the iron ore situation improves and we are able to operate our plant in full capacity during this period, interest cost even in relative terms will come down per tonne and then appear to be lower when you look at the number.