Indian firms rethink overseas mining assets
Unfavourable market conditions force the Indian firms to rethink about investing in overseas mining assets. GVK offers stake to Coal India in Oz coal mine; JSW Steel puts African and Indonesian operations and Aditya Birla can’t find buyer for copper mine
Recently, the GVK group has approached state-run Coal India Ltd to buy equity in its Australian coal mine, JSW Steel Ltd has put the exploration of its African and Indonesian iron ore and coal fields on hold, and the Aditya Birla group is unable to find a buyer for its Australian copper mine.
Indian firms that bought foreign mines during the rally in mineral prices that peaked in 2011-12 are going through tough times. They are looking for opportunities to get bailed out by other, cash-rich companies, or are waiting for a turnaround in commodity prices to rescue them.
The overseas mining bets turned sour because of a drop in the prices of minerals and metals on slower economic growth in India and other parts of Asia in the past two years as global mines overproduced betting on a good Asian demand.
Thermal coal prices are at a three-year low of around $75 per tonne and coking coal contracts are being negotiated at a six-year low of around $125 a tonne, Bloomberg data shows. Iron ore prices, too, have slipped from last year’s high of $132 a tonne and are at around $110 per tonne. Base metals such as aluminium and copper are trading at multi-year lows.
“Many companies had acquired greenfield assets when commodity prices were high,” said Chirag Shah, director of research at investment bank Barclays Capital. “But exploring these mineral assets doesn’t make sense at the current commodity prices.”
Other core issues
There are other problems as well. Several firms acquired assets in Africa, Australia and Indonesia are in remote locations that need heavy investment in building railways and roads to transport their output, and the companies still haven’t been able to find partners to develop the infrastructure.
Policy changes in host nations, delays in securing environmental clearances and opposition from activists, and the companies’ own debt levels have also lessened the hunger for rapid growth overseas. To be sure, the companies that have purchased unexplored blocks overseas are likely to have paid small amounts so they don’t run the risk of having to service big loans, a merchant banker said on condition of anonymity.
The top six steel companies Tata Steel Ltd, Steel Authority of India Ltd,JSW Steel Ltd, Essar Steel India Ltd, Jindal Steel and Power Ltd and Bhushan Steel Ltd—most of which have been the frontrunners in asset purchases overseas, were saddled with collective debt of Rs.154,522.6 crore as of 31 March 2013. With difficulties in developing overseas mining assets persisting, GVK Coal India late last year, offering the world’s biggest coal miner a stake in its coal assets in Queensland, Australia, according to industry people, don’t want to be named. Coal India that earmarks Rs.35,000 crore for overseas asset purchase in the next five years, spurned the proposal because of risks related to project implementation, the strengthening Australian dollar, weakening markets and the high cost of production, two of the people said.
GVK said the Australian project had a competitive cost structure, a rail and port infrastructure tie-up with Australia’s Aurizon Mines Ltd, quality coal, and approvals at an advanced stage. A GVK spokesperson, in an email response, said that while coal mines may be facing closure globally because of high-cost structures or coal quality, “the medium to long term prospects of coal demand remain strong and this will create a supply shortfall in the coming years”.
JSW Steel has put the development of its iron ore and coal blocks in Africa and Indonesia on hold. “We do not intend to sell any assets and they continue to be a part of our strategic portfolio,” said Prashant Jain, head of corporate strategy and development at JSW Steel. “The growth is envisaged on the domestic front. We are targeting domestic steel demand as India will build more infrastructure and more cars.” JSW does not have captive iron ore mines in India, but has a 14.3 million tonne steel production capacity, is also one of the prominent bidders for UK steel trader Stemcor’s Indian assets.
An executive close to the Aditya Birla group said the company had not been able to find a buyer for its Mount Gordon copper mine in Australia. Bids it received weren’t high enough, the person said. An analyst said he sees difficulties ahead. “Most of the mines owned by Indian companies in Australia are high-cost mines and not really economical to operate under current low commodity prices,” said Rakesh Arora, managing director and head of research at Macquarie Capital Securities (India) Pvt. Ltd.
Some companies like the Tata group and Jindal Steel and Power Africa where cost of production is lower. “However, there too, the sustained fall in coal prices makes them vulnerable and they might restrict further investment in these assets,” Arora said.