Street overly optimistic on Karnataka: The companys Narrain mines have been placed in Category B, as per the CEC recommendations. Our ground research suggests that it will take at least 5-6 months to restart production, as the company will have to adhere to a new mining plan coupled with a lower production limit for Chitradurga-Tumkur at 5 million tonne.
What possible impact on production is expected in Goa There will be volume impact on account of two reasons (i) Indian Bureau of Mines (IBM) has reduced the cut-off grade for reserves to <45% Fe and Goan miners (probably including Sesa, though we have not confirmed the same with the management) have sold ore exceeding their environmental clearance. This volume needs to be streamlined. A similar process is underway in Karnataka, and (ii) the issue of contract mining is being looked through in detail, as contract mining is not yet legally defined in the Mines Regulation Act of 1960 and has not been addressed even in new MMDR (Minerals Development & Regulation) draft.
Realisations to trend down in Q4FY12. Sesa and NMDC, both reported higher than expected realisations in Q3FY12, contrary to the trend observed in iron ore prices globally. We believe that realisations would go down sequentially, as NMDC has already announced price cuts for Q4FY12 and the effect of global prices come with a lag of one quarter.
Downgrade to Sell: The compelling case of base business valuation no longer holds at current levels. Neither is there any growth case which can be built on the base business (based on issues which we are witnessing in Karnataka and the possible implications that Goa can face), nor is there any assurance that minority shareholders will continue to enjoy the cash dividend from Cairn, given the recent media speculation around the group restructuring. Downgrade to Sell with a target price of R192.