Tata Steel: Win-win deal

The steel major's joint venture in Ivory Coast is set to cut costs at the Corus facility

Tata Steel’s announcement of a 75 per cent stake in a joint venture to develop iron ore facilities with a state-owned company in Ivory Coast is clearly aimed at bringing down the cost of production at its Corus facility.

Corus supplies steel to the higher end of the Western European steel market, but it does not have iron ore captive resources in contrast to its parent in India.

Analysts point out that supplies of iron ore from the JV in Ivory Coast could directly help in bringing down Corus’ cost of production by $50-60 a tonne over the medium term. The Tata Steel stock rose 3.4 per cent to Rs 865 on Wednesday.

Tata Steel’s cost of production in the domestic market is estimated at $280-300 a tonne (excluding freight cost to the end-customer), while that of Corus is estimated at more than $450 a tonne.

The production cost is higher at Corus for two reasons: its products are value-added and reasonably complex, and it does not have access to captive resources.

The JV in Ivory Coast would give Tata Steel access to reserves of over 700 million tonnes of ore and it is expected to invest $1.5 billion (approximately Rs 6,000 crore) over the medium term to develop these facilities.

Supplies from this facility will be critical to Corus at a time when global contract iron ore prices are expected to jump, when long-term contracts come up for renewal next year.

In addition, Corus is expanding its output of saleable steel by nearly 300,000 tonnes in FY08 and a further 350,000 tonnes in FY09, which would require crucial raw material supplies.

Prior to this expansion, Corus’ finished steel capacity was 22.1 million tonnes.

To part-finance its Corus acquisition, Tata Steel is planning to dilute its equity by nearly 43 per cent via its rights issue to raise up to Rs 6,000 crore.

Prior to this development in Ivory Coast, Tata Steel has also been focusing on improving its captive raw material supplies via a JV to develop a hard coking and thermal coal project with Riversdale in Mozambique. At Rs 865, Tata Steel trades at a reasonable 12-13 times estimated FY08 and 9.5 times FY09 earnings.

Source - Business Standard