Jindal Steel & Power Ltd. (JSP), India’s second-biggest steelmaker by value, is approaching an iron ore mine acquisition in West Africa for at least $2 billion as it seeks raw material to feed its factories at home and in Oman.
The investment will secure deposits of at least 1 billion metric tons and include building a transport line, Executive Director Manish Kharbanda said in an interview, without identifying the seller. The New Delhi-based company has looked exhaustively for reserves in Sierra Leone, Ghana, Mauritania, Sudan, Gabon and Liberia, he said.
Jindal Steel, which plans to more than quadruple capacity by spending as much as 350 billion rupees ($6.5 billion) in the next two years, is looking to secure raw material sources following curbs on iron ore mining at home. The New Delhi-based company, run by billionaire lawmaker Naveen Jindal, ended a $2.1 billion contract with the Bolivian government in July to develop the El Mutun iron ore mines following a dispute.
“As long as Jindal Steel doesn’t go overboard with the price it pays, the overseas acquisitions should serve it well,” said Chirag Shah, an analyst at Barclays Plc in Mumbai, who has an overweight rating for the stock. “There are risks in western Africa -- one has to be wise enough not to commit a lot of money upfront.”
Jindal Steel shares fell as much as 2.8 percent to 405.40 rupees and traded at 405.80 rupees as of 2:25 p.m. in Mumbai. The shares have fallen 10 percent this year, compared with a 21 percent gain in the benchmark Sensitive Index.
“We’re in advanced stages of talks, Kharbanda said, without giving details. “The lesson we learnt from Bolivia is to not put all our eggs in one basket.”
“It’s the familiarity with African culture that draws us to that continent,” said Kharbanda, who returned from a six- week trip to western Africa this week. “Managing cultural diversity is a big challenge in doing acquisitions.”
Other obstacles include uncertainty about the estimated reserves, lack of infrastructure to ship iron ore from the mines and political instability, he said. The scourge of transnational crime, drug and arms trafficking, terrorism and piracy are threatening West Africa’s slow march to stability, the United Nations Office for West Africa said in an Oct. 8 press note on its website.
“Investment in infrastructure is a big factor in calculating the rate of return,” Kharbanda said. “One shouldn’t consider western Africa if one is not looking at a time span of less than eight to 10 years.”
In India, concern over illegal mining and environmental breaches has prompted the government to restrict mining in the biggest iron ore producing regions of the country. India’s top court banned mining in the southern state of Karnataka last year and agreed to partially lift the ban this year. Goa, the largest exporting state, halted mining after a government-appointed panel reported damage to environment.
Goa is the first among seven mineral-rich states the panel will probe, said Vishwapati Trivedi, former secretary at the mines ministry, raising concerns the curbs may widen.
Jindal Steel’s capacity will increase to 13 million metric tons by 2015, according to V.R. Sharma, chief executive officer of the steel business. The company, which runs a 3 million ton steel plant in the central state of Chhattisgarh, is building a mill each in the eastern states of Odisha and Jharkhand and a factory in Oman.
Spot iron ore prices at China’s Tianjin port have risen 33 percent after nearing a three-year low last month. At $115.50 a ton as of Oct. 18, prices are 23 percent down from this year’s peak.
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