Baosteel Partner Plans to Sell Stake to Expand: Corporate India

Visa Steel Ltd. (VISA), the Indian partner of China’s second-largest steelmaker, will sell new shares to fund a 17 billion rupee ($310 million) expansion and cut debt, as it tries to end six straight quarters of losses.

The sale “at the right price” will reduce the founders’ holding to 51 percent from 74 percent, Chairman Vishambhar Saran said in a telephone interview yesterday, without giving a timeline. Visa, which shut its sole steel plant in the eastern state of Odisha early this year because of an iron ore shortage, is banking on the local government to lift curbs and resume supplies of the raw material by January, he said.

“The next year will be a profitable year,” said Saran, whose family controls the Kolkata-based company. “We’re incurring costs without running the plant, which is the main reason for the losses. Odisha’s move to ensure iron ore for local steelmakers will help us restart the plant.”

Iron ore supplies to Baosteel Resources Co.’s local partner were snapped after some mines failed to renew their permits, while others were shut down on charges of illegal extraction last year. The state government now plans to secure half the mining output to factories located within the state, while curbing licenses for exports.

‘Big Boost’

“Globally, the steel sector seems to be coming out of the woods and Odisha’s policies to promote integrated steel plants will be a big boost for Visa,” said Sharad Avasthi, an analyst at Kolkata-based SPA Capital Securities Ltd. “The resumption of work at its steel plant will mean better servicing of debt, higher income and an increased confidence in the stock.”

Visa, which also produces metallurgical coke and ferrochrome, has declined 18 percent this year, compared with the benchmark Sensitive Index’s 26 percent gain. The shares rose 0.3 percent to 47.50 rupees at the close in Mumbai.

With the steel plant out of commission, Visa has focused on selling ferrochrome, used to rust-proof steel, and coke used in blast furnaces. Visa, which consumed almost a third of its own coke output, is now selling its entire production to rival mills, Saran said.

“We’re ramping up ferrochrome and coke output, both of which have a good market,” he said.

Visa Steel last month sold 49 percent of its coke business to Lisle, Illinois-based SunCoke Energy Inc. (SXC) for about $67 million. Visa, which retained the controlling interest, will use the money to repay debt, Saran said.

Doubling Capacity

Visa plans to restart its steel plant in Odisha’s Kalinganagar town next quarter and double the annual capacity to 1 million tons, Saran said. The ferrochrome plant will be expanded to 100,000 tons, from 50,000 tons, he said.

A separate venture with China’s Baosteel, being built to produce 100,000 tons of ferrochrome will also start output next year and expand in phases. Visa holds 65 percent of the venture, with Baosteel owning the remaining stake.

Ferrochrome produced by this venture, called VISA BAO Ltd., will be used by Baosteel’s stainless steel mill in China, according to Visa’s website.

“The cost of doubling capacity will be lower as we already have a lot of infrastructure like water and power distribution ready,” Saran said. “The increased capacity will also give us economies of scale and improve efficiency.”

Having no iron ore mines of its own has placed Visa at a disadvantage to rivals that own mines. The closing of Visa’s plant led to debt piling to as much as 20 billion rupees, Saran said. The company approached lenders to revamp debt and won a two-year moratorium on principal and interest payments, he said.

Mining Curbs

Recent mining restrictions in the states of Karnataka, Goa and Odisha, three of the biggest producers of iron ore in the country, have created a shortage of the key steelmaking ingredient and forced mills in those states to shut down or cut production. The miners are struggling to get environmental approvals after the federal government tightened rules for renewing permits, asking them to seek fresh endorsement from local resident groups in areas where their mines are located.

A federal government panel in September reported Goa exported 350 billion rupees of illegally mined iron ore, prompting the provincial government to ban mining in the coastal state. The M.B. Shah Commission is now probing mining violations in Odisha and will later move to five more states.

Lack of iron ore at Visa’s plant coincided with stagnating steel demand, which hampered revenue, SPA’s Avasthi said. The company posted five straight quarterly losses starting July 2011, after interest costs climbed and sales fell. The quarter ending March 31 is a favorable time for the mill to restart as steel prices are rebounding, Avasthi said.

Steel Authority of India Ltd., the nation’s second-biggest producer of the alloy, cut rebates on products this month, the first price increase in at least three months, chairman C.S. Verma said on Dec. 6.

Visa, which supplies to automobile and construction companies, is banking on rising demand for vehicles, homes and public works in India. The nation’s steel demand is forecast by the government to increase 5 percent next year, compared with the global pace of 3.2 percent predicted by Worldsteel.

To contact the reporter on this story: Rajesh Kumar Singh in New Delhi at rsingh133@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

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