Third party mining operations in Orissa ceased- To dent volumes & earnings Sesa Goa announced closure of its third party mining operations in Thakurani mine, Orissa as it was unable to renew the contract on viable commercial terms on long-term basis. We believe this will negatively impact volumes; however the impact on earnings would be less severe due to third party nature of the contracts which entail higher costs.

Following these developments we reduce our volume estimates by
4.4% and 10.0% in FY11 and FY12 respectively; consequently we expect our earnings to decline by 1.4% and 4.5% in FY11 and FY12 respectively.

Orissa contributed ~1.9mnt of iron ore production which is ~9% of total production in FY10 and was expected to contribute ~20% to the incremental production volume by FY14. However, posttermination of the mining contract, the incremental production is expected to be only 40mnt.

Outlook

We expect iron ore prices to correct going forward and have assumed blended realisations/t of USD89 and USD70 in FY11 and FY12 respectively. We expect Sesa’s iron ore operations to generate blended EBITDA/t of USD58 and USD40 in FY11 and FY12 respectively.

VALUATIONS AND RECOMMENDATION

At CMP of Rs304 the stock is trading at 5.4x FY12E EV/EBITDA. We maintain 'HOLD' on the stock with a revised target price of Rs302
(Sesa's business valued at Rs215/share based on DCF {Ref Pg. 2}, Cairn stake @ 20% discount to CMP).