Jindal Nears Africa Mine Deal on Curbs, Bolivia: Corporate India

Jindal Nears Africa Mine Deal on Curbs, Bolivia
Jindal said in July that it was “forced to terminate” its $2.1 billion contract signed in 2007 to develop 20 billion tons of iron ore reserves at El Mutun because President Evo Morales’ government was “unwilling to fulfill” its obligations. Source: JSW Steel Ltd. via Bloomberg

Jindal Steel & Power Ltd. is nearing a deal to buy an iron ore mine in West Africa for at least $2 billion as curbs at home and a failed investment in Bolivia drive India’s second-biggest steelmaker by value to look elsewhere for supplies.

Jindal’s investment in the region will involve building a transport line and developing a port, and the iron ore supplies will feed its factories in Oman and back home, Executive Director Manish Kharbanda said in an interview last week, without identifying the seller. The spending will be staggered over a period of time, he said.

Jindal, which wrote off more than $90 million after abandoning a Bolivian project in July following a dispute with the government, is struggling to get new mining permits in India because of environmental regulations. A purchase agreement will help the company secure reserves of at least 1 billion metric tons.

“It’s becoming increasingly evident that getting a new iron ore mine in India will be difficult,” said Prasad Baji, an analyst with Edelweiss Financial Services Ltd. in Mumbai, who has a buy rating for the stock. “The investment is not too large for Jindal Steel.”

Securing assets is crucial to the alloy maker controlled by billionaire lawmaker Naveen Jindal as it plans to more than quadruple capacity in the next two years and reverse a slide in profit that dropped to the least in at least eight quarters. Vale SA, Rio Tinto Group and ArcelorMittal are among companies with projects in West Africa, a region that Oslo-based DNB Bank ASA said in a research report is the “most important growth” area for iron ore in the world.

Profit Drop

Jindal Steel shares fell 1.7 percent to 400.45 rupees in Mumbai, extending this year’s loss to 12 percent, compared with a 22 percent advance in the benchmark Sensitive Index. X Net income at the New Delhi-based company unexpectedly dropped 58 percent to about 4 billion rupees ($74 million) in the quarter ended June 30 from a year earlier because of an impairment charge on its investment in Bolivia.

Jindal said in July that it was “forced to terminate” its $2.1 billion contract signed in 2007 to develop 20 billion tons of iron ore reserves at El Mutun because President Evo Morales’ government was “unwilling to fulfill” its obligations. Bolivian Mining Minister Mario Virreira said July 18 that the Indian company withdrew because it lacked funds and not because of government pressure. That was the biggest project to be canceled in Bolivia since Morales took office in 2006.

Debt to Equity

In addition to developing the El Mutun iron ore mines, Jindal had planned to build a 1.7 million ton-per-year steel plant in the South American country, a sponge-iron factory, a pellet unit and a power project, according to the company’s website. Jindal had spent $90 million on the project, according to the company.

Jindal and its units together had a long-term debt-equity ratio of 0.75 as on June 30, according to an investor presentation on their website. Cash reserves and equivalent were at 1.3 billion rupees as of March 31, according to data compiled by Bloomberg.

“The question is not whether it can digest it financially, but whether it can execute the project,” said Edelweiss Financial’s Baji. “The investment in West Africa is manageable from a debt-equity point of view.”

Jindal’s experience in Africa and its familiarity with the local culture is luring the company to the continent, said Kharbanda in the interview. The Indian company already operates coal mines in South Africa and Mozambique.

‘Eggs in One Basket’

“The lesson we learnt from Bolivia is to not put all our eggs in one basket,” he said. “One shouldn’t consider western Africa if one is looking at a time span of less than eight to 10 years.”

The company has looked exhaustively at reserves in nations including Sierra Leone, Ghana, Mauritania, Sudan, Gabon and Liberia, Kharbanda said.

Projects in Sierra Leone, Guinea and Cameroon will increase iron ore shipments from West Africa, DNB Bank said in its report on Sept. 28. Total African ore deliveries will almost quadruple from last year, while global exports of ore and coal will be 3.48 billion tons in 2017, compared with 1.76 billion tons last year, according to the report.

“Being dubbed ‘the new Pilbara,’ the region is considered by many to be the most important growth region for iron ore in the world,” the bank said of West Africa, referring to the area in Western Australia where Rio Tinto and BHP Billiton Ltd. have ore mines.

Vale, Rio Tinto

Production at the Simandou project in Guinea is on course to begin in 2015, according to Rio Tinto, the world’s second-largest producer of iron ore. Jindal Steel’s potential investment will follow Sesa Goa Ltd., a unit of Vedanta Resources Plc, and ArcelorMittal, the world’s biggest steelmaker, both of which own mining rights in Liberia. Brazil’s Vale, the largest iron ore miner, has assets in Guinea as well.

In August, five people were killed and three injured in Guinea after gunmen attacked the village of Zogota, following protests by locals to an iron ore mine that Vale is developing, according to the Guinean Human Rights Oraganization.

Jindal Steel plans to spend as much as 350 billion rupees in the next two years as it boosts capacity even as concerns over illegal mining and environmental violations in India have prompted the government to restrict mining in the biggest ore producing regions of the country.

Mining Banned

India’s top court banned excavation 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 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.

Challenges in Africa include uncertainty in reserve estimates, lack of infrastructure to ship iron ore from the mines and political instability, Kharbanda said. The scourge of crime, drug and arms trafficking, terrorism and piracy threaten West Africa’s slow march to stability, the United Nations Office for West Africa said in an Oct. 8 press note on its website.

Jindal Steel in July acquired Canada’s CIC Energy Corp., which is developing a coal mine in Botswana, for $114 million. CIC Energy, based in the British Virgin Islands, is developing the Mmamabula coalfield in Botswana, estimated to hold about 2.4 billion tons of coal, according to the company’s website.

“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.”

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