SAIL's stockpile of iron ore fines give company opportunity for profit

Profits from the sale of high-grade iron ore fines could help state-owned company reduce debt

A stockpile of 43 million tonnes of iron ore fines has come in handy for Steel Authority of India Ltd (SAIL) as the state-owned company tackles an economy battered by the coronavirus pandemic.

SAIL mines have a stock of 42.98 million tonnes of sub-grade iron ore fines considered as inventory with nil value in 2018-19. When the mines ministry in September 2019 allowed SAIL to sell up to 25 per cent of its total mineral production in the previous year, the equation changed.

The ministry gave the permission to solve an anticipated disruption in supply due to the expiry of 31 working mines on March 31, 2020. The mines shutting down would have caused a shortfall of 60 million tonnes in 2020-2021, or approximately 29 per cent of the total production of iron ore in the country.

SAIL had the capacity to enhance iron ore production from captive mines by 7-8 million tonnes in 2020-2021 and by 10-12 million tonnes in 2021-2022. But its plants were not suited to consume the low-iron content fines. Hence, it made sense to auction the fines and plug a possible gap in availability, the valuation for which has now been done.

According to the steel major's notes to year-end results, the value of the fines as of March 31, 2020, was Rs 3,791.18 crore after a net write-down of Rs 329.67 crore on account of Covid-19. The valuation was based on the average selling price of similar sub grade fines by the Indian Bureau of Mines (IBM).

This significantly propped up SAIL's financial performance as it recorded a profit before tax of Rs 4,181.17 crore in the quarter ended March 31, 2020 and Rs 3,170.66 crore for the year. SAIL didn't comment on the subject.

ICRA senior vice president, Jayanta Roy, said, "SAIL' s operations were profitable in Q4 even without the huge gain reported on account of its iron ore inventory. This is because of the consistent increase in domestic steel price since November 2019."

"However, for the year FY2020 as a whole, the company would have suffered a loss but for the above inventory gain due to adverse commodity prices in the first seven months of the year," he added.

An Emkay Global Financial Services post-results report on SAIL said that the profits from the sale of high-grade iron ore fines could help reduce debt in addition to revenue from the sale of iron ore dumps. "This should aid in deleveraging," it said. In April, during lockdown, SAIL's borrowings had crossed Rs 52,000 crore.

The Emkay report also said that the sale of dumps was subject to approval by the Jharkhand government. Out of 43 million tonnes of iron ore dumps identified and valued, 31 million tonnes are in Jharkhand, where clearance from state government was awaited, it said.

"SAIL expects the dumps to be sold over a period of 3-4 years. It also has a plan to set up iron ore beneficiation plants to use low grade ore fines extracted from the mines," the report further added. However, that may not be in the immediate term.

According to the company's corporate presentation, SAIL has plans of setting up new pellet plants that would use the existing reserve of fines including dumps and slimes at captive mines.