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Sesa Goa drops 20% from all time high of Rs 490+ to below Rs 400…It’s a high Beta scrip…so volatility is expected

Dear Madhu,Hope this updated view on Sesa Goa answers your query you just posed on another blog….I’ve put it up as a seperate blog as it will serve a wider audience

In 2009,Sesa Goa had scaringly dropped to Rs 60 from levels of near Rs 175…and then burst away to record an all time high of Rs 490+….and in a matter of a few days now it has dropped below Rs 400

So what’s what’s unnerving Investors to unwind their positions in Sesa Goa?…a few weeks ago it was the ban on import of Iron ore of Fe content 60 and below announced by the Traders Association in China….I had blogged that this would not really impact Sesa Goa too much….but investors were unnerved and began reducing exposure…Price dropped to below Rs 430…and then came a bombshell from the Australian government…actually they had warned in January of sweeping tax changes in the Mining Industry…From July 2012 the Australian Mining Industry will face a higher tax of 40%  on the ‘super profits’ that they are making….US $ 2.8 Billion is expected to be the Tax collection from this Industry in 2012…BHP Billiton,Australia’s and the worlds biggest Mining Company expects their average tax rate on operating profits to go up to 57%……Mining Sector Sources opine it will lead to rising iron ore prices and China will have to absorb this…it may deter though,Overseas investments in Australia and impact the country’s competiveness….As expected,this tax hike announcement is facing very strong opposition in Australia…One view is that it is not fair to tax Mining Companies higher as their record profits have saved Australia the blushes in the Financial Mess that has enveloped the Developed Nations….also it is unfair to first allow billions of dollars in as overseas investments in ongoing mining projects and then hike the tax rate on profits that are expected to be generated  

China appears to be in a tearing hurry and is raking up steel capacity to record highs and therefore the demand for Iron Ore is robust and unabated…as long as this situation continues,Iron Ore Companies will continue making ‘super profits’….Sesa Goa is no exception here….just hope India does not follow suit like Australia and ramps up the tax rate on ‘super profits’ of Indian Mining Companies….what it has done ,however,is raise the export tax from 10% to 15% on iron ore slumps to try and ensure adequate domestic supply of Iron ore as India is on track to more than double it’s steel production from the current 54 million tonnes to a record 124 Million Tonnes in 2012/13

Sesa Goa had dropped today to below Rs 370 levels but recovered to close just a shade under Rs 400…It can go down further only in two scenarios

  • Iron Ore Prices drop to levels of US $ 50/t…..this can happen if China reverses it current ongoing Strategy to ramp up Steel Production and either stops or significantly reduces Importing Iron Ore….unlikely in the short term
  • India takes a cue from Australia and  announces super tax rates on the super profits of Iron Ore Miners…unlikely   

The Current CIF export to China Spot Price of Iron Ore Mines with high deposits of Fe Grade 63.5 has reached US $ 190/ton …compare this with the quarterly contractual price of US $ 110 per ton that was struck by the World majors with Japanese and South Korean Importers just a few weeks ago….and Sesa Goa is a Spot Player and exports mines even in the 61% to 63 % Fe Grade

Sesa Goa should record ‘super profits’ this year…In fact it’s profits this year may double to match the revenue levels of 2009/10 ! it sold over a Billion dollar of Iron ore and with high operating margins it recorded a strong profit of nearly half a billion dollar….It’s Reserves are Rs 7126 crs and the Equity is Rs 83 crs (FV Rs 1)…giving a networth of over Rs 7200 crs…this should cross Rs 10000 crs this year as EPS levels of Rs 26 surge towards Rs 40 and beyond…..Diluted Equity will be Rs 90 crs after FCCB Full Conversion   

So as it stands,I’m not too worried about Sesa Goa….yes, one may not initiate fresh buying and one could reduce exposure given the recent adverse announcements that has created an air of uncertainty on the level of ‘super profits’ going forward and the fact that Valuations are not exactly cheap in this context of changing dynamics

It was a flat 100 meters sprint race for Sesa Goa…leading from start to finish…You would have sensed my excitement in my Sesa Goa blogs of April 8 and April 9,2010……It’s now more like a 110 meters Hurdles…Sesa is still leading…At Rs 60 last year,Sesa Goa was a screaming buy,available at less than projected 2009/10 Book of Rs 80…Book Value is actually Rs 86 and will surge to Rs 120 + this year….The current Rs 400 Share Price level is over three times projected 2010/11 book and under 10 times Forward Earnings Multiple….not exactly a bargain now…….however,with proven iron ore reserves of 250 million tons,the embedded present value incremental when added to book at current margins, gives a Price Indicator of over Rs 700

But you’ll have to live with the relatively higher Volatility in Sesa Goa…It currently is a victim of both macro (as Sensex retreats from near 18000 levels to 17000 levels inside a month) and micro ( adverse developments and announcements in India,China and Australia affecting the Company) sentiment…….if your risk profile does not allow for this,then you should simply book your profits and exit….if you’ve actually entered at Rs 400 + levels…well you shouldn’t have as you were ignoring your risk profile

Sesa Goa should play out an interesting second half in 2010 and remains a compelling story…though more suited for Aggressive Profile Investors

Will keep a strong eye on it      


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