New Delhi: Global giant Tata Steel may face higher raw material costs if its mines in Odisha remain closed for over a year following Supreme Court's interim stay on iron ore mining, Moody's Investor Service said. "If Tata Steel Ltd's (Ba3 negative rating) seven mines in the Indian state of Odisha stay closed for over a year, the company's only operational crude steel making facility in India will likely face higher raw material costs and lower EBITDA levels," Moody's said in a statement.
The Supreme Court earlier this month had ordered interim stay on the iron ore mining in Odisha by companies whose lease agreements had expired and were not renewed by the state government. As a result, all 26 mines in Odisha - including Tata Steel's seven captive iron ore mines - were ordered to cease production pending reviews of their leases. The orders came on the heels of the iron ore mining shutdowns in Karnataka and Goa, after the Shah Commission report and investigation into illegal mining. "Moody's notes that India's Supreme Court has instructed the state of Odisha to resolve the matter of the mine closures within six months.
In addition, five of the 26 licenses under review have reportedly been recommended for renewal, including one of Tata Steel's mines," the statement said. It pointed out that the bulk of Tata Steel's iron ore supply is mined in Odisha. "We note that if the outcome in Odisha mirrors that in Goa and Karnataka then, even when the issues are resolved, the approved extraction rate may fall short of the previous rate of iron ore production," said Alan Greene, a Moody's Vice President and Senior Credit Officer.
"Moreover, the timing of the shutdown is inconvenient for Tata Steel. Over the next 9-12 months it is still spending heavily on its new steelworks prior to the start of commercial operations scheduled for early 2015," he added. At the same time, the company is looking to refinance Tata Steel UK Holdings Ltd's acquisition debt, before its covenant conditions tighten in September 2015, the statement said.
Nevertheless, Moody's does not expect Tata Steel's production rate to slow as its operational crude steel making facility in India takes iron ore from Jharkhand as well as Odisha, it added. At the close of the last fiscal, the company reported inventories equal to 71 days of cost of goods sold. Moody's also said it believes that Tata Steel has accumulated prudent stocks of iron ore at the mines, in transit and on site.
