Export duty on iron ore increased to 20% ad-valorem across grades from 15% for lumps and 5% for fines. Pellets were exempted from export duty (export duty was 15%). The move is negative for ore exporters and positive for India ore buyers. We predict a split impact of this; with iron ore prices in India falling to equate with duty induced drop in international realizations, as well as some rise in international iron ore prices as exporters pass on higher costs (or withdraw supply) from international markets.Only time will display the extent of each.
While we expect international iron ore prices to move marginally higher to account for some part of higher duty, ore export costs will increase sharply. We expect the impact on Sesa Goa?s FY12e EBITDA to be around 15%. We expect domestic ore prices to decline as supply increases. The extent of declines could depend on how global iron ore prices react to the increase in duty and the eventual lifting of the export ban in Karnataka, which we expect will happen soon.
Jindal Steel & Power?s export of pellets and JSW Steel Indian ore purchases will cost less. We are reducing our estimates of earnings for the iron ore miners. We expect Sesa Goa to be impacted most from this move; we cut FY12e and FY13e EBITDA by 15% and 14%, respectively. We cut NMDC?s FY12e and FY13e EBITDA by 6% and 9%, respectively due to our expectations of a decline in domestic prices .
We value Sesa Goa on FY12e EV/EBITDA of 3.5x and derive a new stock target price of of R310, down from R380, and we retain our Neutral rating. value NMDC on FY12e EV/EBITDA of 8.0x and derive a new target price of R250, down from earlier R260, and retain our Underweight rating.
HSBC