The Odisha government’s decision to lift a temporary mining ban will enable Tata Steel and Steel Authority of India (SAIL) to maintain their profitability and shield them from volatile iron ore prices, according to Standard & Poor’s Ratings Services.
The Odisha government recently allowed Tata Steel and SAIL to resume iron ore mining in the state. The two companies have historically benefited from access to captive iron ore mines. Tata Steel was more exposed to the effects of the ban than SAIL.
“We estimate that Tata Steel mines 70% to 75% of its iron ore from Odisha. We believe that the temporary halt on mining would not have affected the profitability of Tata Steel and SAIL because their inventory was sufficient to bridge any shortfall caused by the short disruption,” S&P said.
“A longer lasting ban, as in the states of Karnataka and Goa, would have weakened these companies’ EBITDA (earnings before interest, taxes, depreciation and amortisation) margins,” it said.
“The Odisha state government responded to the ban by providing express clearances to enable Tata Steel and SAIL to resume mining and laying down certain conditions that the companies must fulfil to complete the license renewal process,” the agency said.
On May 16, 2014, the Supreme Court temporarily suspended mining operations in 26 mines in Odisha. The affected mines were operating under the second or subsequent rounds of deemed mining license renewals, which are not allowed under the Mining and Minerals (Development and Regulation) Act, 1957.
“The situation in Odisha contrasts with that in the states of Karnataka and Goa, where the resolution of an iron ore mining ban has been more long-winded,” S&P stated.
“The sluggish administrative response has adversely affected the operating performance and financial health of many companies, such as Vedanta Resources, and reflects poorly on the overall operating environment in India,” the agency noted.
“However, we acknowledge that the mining issues in Karnataka and Goa are more complex because of environment-related issues,” it said.