Sesa’s Agarwal Plans $2.4 Billion Liberia Spend: Corporate India

Sesa Goa Ltd., India’s largest exporter of iron ore, plans to invest as much as $2.4 billion to develop assets in Liberia in its first overseas expansion after a court-ordered mining ban halted production at home.

The company, controlled by billionaire Anil Agarwal, expects to use the money over the next four years on 30 million metric tons of mining capacity in three properties in the western African nation, Managing Director Prasun Kumar Mukherjee said in a telephone interview. The first part of the project, scheduled to start by March 2014 with 4 million tons of capacity, will be financed through borrowings because restrictions at home have stopped cash flow, he said.

“The Liberia project is progressing on schedule and right now the only issue is how to continuously fund it,” Mukherjee said from his office in Panaji, Goa. “Originally, the idea was to finance it all internally but since one channel has stopped, we are looking at a line of credit.”

Sesa, a unit of Agarwal’s London-based Vedanta Resources Plc, is among Indian miners and steelmakers including Jindal Steel & Power Ltd. seeking to secure raw materials abroad after authorities cracked down on mining to protect the environment. The development of the Liberian assets may help reverse Sesa’s fortunes as it struggles with debt close to a record and awaits approvals to resume ore extraction at home, said Giriraj Daga, an analyst at Nirmal Bang Equities Pvt. in Mumbai.

Share Performance

Shares of the company rose 1.9 percent to 186.80 rupees at close in Mumbai today. The stock has declined 8.3 percent in the past year, compared with a 19 percent advance in the benchmark BSE Sensitive Index. Sesa’s revenue from iron ore tumbled 99 percent in the quarter ended Dec. 31.

“Africa is one of the best destinations for securing low-cost resources and Sesa is doing exactly that,” Daga said. “If it is able to develop the project as envisaged, the move will benefit the group.”

Sesa said in August 2011 that it would pay $90 million to buy 51 percent of Western Cluster Ltd., which had plans to develop iron-ore deposits and transport infrastructure in Liberia. Last quarter, it bought the remaining stake.

The company is seeking to hire mining contractors to start operations in Bomi, the site for the first phase of the Liberia project, according to an ad today in the Business Day, a Johannesburg-based newspaper. The contractor will carry out mining activities, including drilling, blasting, loading and hauling.

‘Unforeseen Risks’

The iron-ore exporter may face challenges and “unforeseen risks” as it embarks on its overseas quest for resources, said Parin Vora, an analyst at Asia Markets Securities Pvt. in Mumbai. Billionaire-lawmaker Naveen Jindal-controlled Jindal Steel, India’s most valuable producer of the alloy, said in June that it terminated a contract that it signed in 2007 to build a $2.1 billion mine in Bolivia after failing to secure land and natural gas.

Liberia, devastated by civil wars from 1989 to 2003 that killed an estimated 250,000 people, is recovering under Ellen Johnson-Sirleaf, a Nobel laureate who became the nation’s first female president in 2006. The economy almost doubled to $1.1 billion in 2012 from $600 million in 2006, according to the central bank.

The West African nation, where ArcelorMittal and OAO Severstal operate iron ore mines, is in the process of changing its old mining policies to boost investments.

“The best strategy would be to move in gradually, develop part of the project, assess risks and start early cash flow,” said Nirmal Bang’s Daga. “If all things remain positive, go full steam ahead to complete the plan.”

Total Debt

The strength of the parent, Vedanta, will give Sesa enough financial flexibility to raise debt financing for capital expenditure, said Mumbai-based Sankalp Baid, an analyst at India Ratings & Research, a local unit of Fitch Ratings.

Net debt at Sesa was about 40 billion rupees ($743 million) as on Dec. 31, while cash and equivalent stood at 2 billion rupees, according to Mukherjee. Total debt rose to a record 43.7 billion rupees in the quarter to Sept. 30, 2011, according to data compiled by Bloomberg.

“Liberia is a new territory for the group and it’s best to wait and watch how the project progresses,” said Baid.

Sesa’s decision to invest overseas became necessary after India’s Supreme Court in October suspended extraction in the western state of Goa pending a probe into violations of mining norms. The ban followed a similar action in neighboring Karnataka in August 2011. The court in September allowed opening of some Karnataka mines, excluding those owned by Sesa.

Ban Hearing

The top court is scheduled to hear the case of Karnataka mines on Feb. 1.

“In the case of Karnataka, our reclamation and rehabilitation plan has been approved and we are now hopeful that we will be allowed to restart mining,” Mukherjee said. “I’m sure that by March we’ll find some cash inflow from Goa business also, apart from Karnataka,” he told investors on an earnings call on Jan. 25.

Agarwal is in the process of combining three group companies -- Vedanta Aluminium Ltd., Sterlite Industries (India) Ltd. and Sesa -- to cut costs, revamp debt and boost operational synergies.

Sesa reported a 28 percent drop in third-quarter profit. Group net income fell to 4.97 billion rupees in the three months ended Dec. 31, from 6.92 billion rupees a year earlier, it said in a statement Jan. 24. The profit was mainly due to its 20 percent share in earnings of unit Cairn India Ltd.

“We are continuously driving our Liberian project and have decided to first start at lower capacity for early cash flow,” Mukherjee said. “Since it’s a new geography we want to start fast and cover all possible risks and see how the operations go.”

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