End of mining ban a relief for Vedanta

Bloomberg

Mumbai 

India’s decision to lift a mining ban on billionaire Anil Agarwal’s Vedanta Resources will boost the company’s credit quality and lower its borrowing costs, Moody’s Investors Service says.

A unit of the company, Sesa Sterlite, got clearance from a Supreme Court panel to restart iron ore mines in the southern Karnataka state, it said in a statement on December 28. The cost to protect Vedanta against non-payment for five years already declined 85 basis points in 2013 to 450, while the average price of credit-default swaps on eight Indian issuers climbed 34 basis points, according to data provider CMA.

“It’s been vitally important for Vedanta to get its assets going again and iron ore mining is a key one,” Alan Greene, a Singapore-based analyst at Moody’s, said in a December 30 telephone interview. “This will help Sesa Sterlite’s creditworthiness. The loss of revenue from the iron-ore business had been a tremendous drag on its business.”

The end of the mining ban comes as a relief for Vedanta, which has grappled with a loss of income from ore sales, an official investigation into its stake purchase in Hindustan Zinc and an aluminium unit facing a scarcity of raw material. The resumption of iron output from south India will also help ease shortages faced by local steelmakers including JSW Steel, unplugging a bottleneck to faster expansion in Asia’s third- largest economy.

Sanjeev Verma, a spokesman at Sesa Sterlite, didn’t respond to an e-mail seeking comment on the potential impact of the resumption of iron output on the firm’s finances.

Sesa Sterlite, India’s top producer of aluminium, zinc and copper, has received clearance to produce as much as 2.29mn metric tonnes of iron ore a year, according to Executive Director Prasun Kumar Mukherjee. Output in the three months to March may reach 1.2mn to 1.5mn tonnes and can be sold through electronic auctions, he said. The company’s shares gained 0.7% in Mumbai after the mining ban was removed.

“There is enough local demand for iron ore and the prices are good,” Mukherjee said in a December 30 interview. “We will sell the ore through online auction and also use some ore for our own needs.”

The resumption of iron production by Vedanta in Karnataka has boosted optimism the company will be able to secure similar approvals for the neighbouring state of Goa too, according to SJS Markets. The Supreme Court has also banned mining in Goa.

“This is a huge positive for the group as it will not only add to their earnings but also improve their leverage ratios giving them better bargaining power for refinancing their debts,” Hemant Dharnidharka, the Bangalore-based head of credit research at SJS Markets, said in a phone interview on Tuesday. “With this order, sentiment regarding the company’s operations in Goa has got a boost and there are reasons to believe that the company will get approvals to restart mining in Goa.”

Vedanta has $9bn of repayments due in the five years through 2018, data compiled by Bloomberg show. It raised $2.74bn from the international loan market in 2013.

Indian companies raised $37.3bn in foreign-currency loans and bond sales in 2013, 36% more than a year earlier, as borrowing costs at home remained relatively higher. Top-rated five-year rupee company notes pay 9.63%, data compiled by Bloomberg show. The average yield on Indian dollar debt is 5.70%, according to JPMorgan Chase & Co data. Ten-year sovereign securities in India pay 8.84%, compared with 3.03% in the US and 4.56% in China. The rupee lost 11% last year to 61.8 per dollar.