Sesa Goa has shut down operations at Thakurani mine in Barbil (Orissa). The mine produced 1.9 million tonne (mt) in FY10 and we had assumed ramp up to 3.5 mt by FY12. The mine was operated on third-party basis—the company had entered into a 10-year contract in 1999 with the mine leaseholder on a royalty payment structure. Since 2009, Sesa Goa has been operating the mine based on short-term contracts and was in discussion for long-term renewal. However, these negotiations have failed and the company has decided to exit the arrangement as the offered terms are not commercially viable. The mine had reserves of 69.3 mt as on March 31, 2009, with average iron content of 64.1%, the company?s highest grade. Our resource estimate as on March 31 is 82 mt, which is 23% of the company?s total resources. The mine produced 70% fines and 30% lump.
The Karnataka High Court has upheld the export ban on iron ore imposed by the state government. We see the risk of this ban prevailing for the remaining FY11. However, we expect this issue to be resolved in FY12 and have assumed volumes from the Karnataka mine in our model.
We have cut our FY12 volume estimate from 25 mt to 21 mt, largely due to cessation of operations at the Orissa mine and partly due to assumption of delay in resolving the Karnataka issue. Led by this, our FY12 Ebitda and PAT estimates have been revised down 11% and 10%, respectively. We have reduced the target EV/Ebitda multiple to 4.5 from 5 and excluded Orissa resources in our DCF calculation.
We arrive at fair value of Rs 300/share, lower than the earlier Rs 339 and note that the average one-year forward EV/Ebitda is much lower at 3.8x; we see risk of the stock de-rating further due to lack of volume growth. Our FY12 estimates have downside risk if the Karnataka issue is not resolved. Considering this, we see possibility of the stock trading below fair value and maintain ?Reduce/Sector Underperformer? recommendation/rating.