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Sesa Goa Ltd (updated - 13 June 2009)
Sesa Goa’s acquisition of Dempo’s mining assets will add to its earnings per share in the current year--analysts expect an increase of around 10-12 per cent. That apart, the deal has been done at a very reasonable valuation of around 4 times trailing EV/ebitda ( enterprise value/earnings before interest, tax depreciation).

Not surprisingly the stock closed 5.6 per cent higher on Friday but even before this it had run up sharply. Since April this year, it has gained more than 100 per cent to the Nifty’s 50 per cent and it has risen 40 per cent in the last one month. The Street also likes the acquisition because the bill of Rs 1,750 crore will be paid from its cash balances of close to Rs 4,000 crore.

Also, the timing seems to be good- Rakesh Arora who tracks the metals and mining spaces at Macquarie Securities believes that iron ore prices may have bottomed out. Arora sees demand picking up in big markets like China and feels, therefore, that the current iron ore prices of between $55-60 per tonne should sustain. So it’s just as well that Sesa Goa will have bigger quantities to sell; together with Dempo’s four million tonnes, volumes should be higher by about 20-25 per cent in the current year. Of course, the prices at which the company has entered into long-term contracts are believed to be around 30 per cent lower than what they were in 2008-09. Typically, Sesa Goa sells around 70 per cent of its output in the spot market and enters into long-term price agreements for the rest.

Dempo’s cost of production, at around $17 per tonne, is understood to be higher than that for Sesa Goa which is around $12 per tonne. Analysts point out that Dempo’s operating margin last year was around 43 per cent compared with 51 per cent for Sesa Goa and believe it should be possible for production costs to be lowered at Dempo’s mines. Sesa Goa’s revenues this year are expected to come in close to Rs 5,100 crore over the Rs 4,959 crore posted last year.
source - BS

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Sesa Goa
The bounce back in the Sesa Goa stock of 17 per cent in the last week or so is surprising and at Rs 85 and a valuation of 5.5 times estimated 200910 earnings, the stock is not cheap. That’s because the outlook for iron ore prices isn’t too bright. Although prices rose from their October 2008 lows of $63 per tonne to around $85 per tonne in February 2009, it had more to do with re-stocking by Chinese mills who were simply maintaining inventories. Since spot prices had fallen, the mills used the opportunity to stock up and that pushed up prices. However, spot rates seem to be coming off and have fallen 25 per cent from the February highs to the current levels of $68 per tonne (source: Bloomberg).

Merrill Lynch believes the production cuts by steel makers will not be reversed in a hurry which means demand for ore will be subdued. It reckons there will be a surplus of ore to the tune of 117-183 million tonnes over 2009-11. That can’t be good news for Sesa Goa which exports over 90 per cent of its iron ore. The low cost of production - average fob cost of around $26 per tonne, though should help it arrest the fall in profits. Analysts estimate afall in net sales of about 16-17 per cent in 2009-10 with a somewhat sharper drop in net profits.
source - BS

Sesa Goa (updated - 25 Sept 2009)
The Sesa Goa stock has had a good run over the past fortnight or so, moving from Rs 240 on September 10 to Rs 278 on September 18 and is currently trading at around Rs 272. The reason for the move was the creeping acquisition by the promoters, Vedanta Resources. The promoters have upped their stake in the company picking a 2 per cent stake through open market purchases, taking their holding to just above 57 per cent.

Even before that the stock has risen 160 per cent between January and August with spot iron ore prices bouncing back sharply in the wake of higher pig iron production in China. The well-timed, reasonably valued Dempo acquisition in June also helped. Industry watchers point out that more pig iron was being produced in China in August — compared with growth rates of 5.5 per cent year-on-year just a few months back.

In May, the growth rate was a much higher 20 per cent. As a result, iron ore prices first strengthened but started tapering off towards end August and analysts are not too sure whether the momentum will sustain as steel prices in China have started trending downwards.

Since Sesa Goa has a large exposure to China, they are cautious about the company’s exports to that market. Sesa Goa is expected to post net revenues of close Rs 5,500 crore in the current year with net profits of around Rs 1,700 crore. At the current price of Rs 272, the stock trades at a somewhat expensive 13 times estimated 2009-10 earnings and 12 times 2010-11 earnings.
source - BS

Sesa Goa Ltd (updated - 22 Oct 2009)
Sesa Goa saw its profits and revenues fall a whopping 50 per cent and 38 per cent, respectively, on ayear-on-year basis for the September 2009 quarter even as it sold more iron ore and pig iron. Although the performance includes the numbers of Dempo Mining, acquired in June this year, the Street was disappointed. The results came on Tuesday after market hours.

Sesa Goa’s stock fell 8 per cent on Wednesday as against Sensex’s fall of 1.24 per cent and a 1.7 per cent decline in the BSE Metal index. Profits were down largely due to lower realisations, driven by depressed international iron ore prices. On an average, Sesa Goa’s realisations were down by about 50 per cent to $51 a tonne.

Since mid-August 2009, the basis for calculating royalty charges on iron ore was changed by the government from a fixed rate to the ad-valorem rate of 10 per cent, which led to higher royalty costs. The company’s pig iron and metallurgical coke businesses, too, reported higher volumes, but these were also not enough to offset the decline in realisations. Thus, the revenues and profitability were lower.

The September quarter is typically the weakest for the company as iron ore mining volumes are lower due to the monsoons. The sales mix thus differs with its Karnataka and Orissa mines contributing more as compared to the Goa mines. And, since the Goa mines have a low-cost structure, the impact is visible on the company’s profitability. Going ahead, the company hopes that the second half of 2009-10 will be relatively better, helped by higher volumes and realisations; on an annual basis, iron ore volumes are seen rising 20-25 per cent.

During the quarter, Sesa Goa raised $500 million through an FCCB issue to fund its capex plans, which along with net cash equivalent of nearly Rs 2,000 crore at the beginning of the year is likely to be used to acquire mining assets in India or abroad. Anticipating an acquisition, the stock has outperformed the market in the last one month, while its outperformance since March has been helped by a rise in spot iron ore prices. In the near-term though, analysts don’t expect a significant increase in average iron ore realisations for the company. Overall, given the stock’s outperformance and that it is trading at 12 times its estimated fully diluted EPS for 2010-11, it is not cheap at Rs 319.45.
source - BS