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BW Businessworld

Too Crucial To Be Ignored

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With reports suggesting that International Coal Ventures (ICVL), a joint venture between state-owned SAIL, NMDC, NTPC, Coal India and Rashtriya Ispat Nigam, may also bid for Riversdale Mining, the race to acquire the Sydney-based miner (with mining assets in Africa) is set to heat up.

Two weeks ago, mining giant Rio Tinto came up with an informal bid worth $3.49 billion and there are reports it is raising it further. Analysts are expecting Tata Steel — which already owns 24.1 per cent stake in the miner — to announce a counter bid soon, considering the mines are crucial for its European operations. Rising raw material (iron ore and coking coal) costs are compelling global steel makers to acquire mines for captive use.

Tata is no stranger to aggressive bidding. In January 2007, it won a bidding war with CSN to acquire Anglo-Dutch steel giant Corus. But so far, the company has only said that Riversdale is a strategic investment and that it would take "appropriate action as per the situation". If Rio wins the race, the 24 per cent stake could fetch Tata around $840 million (Rs 3,813 crore), says a metals analyst.

Ravindra Deshpande, analyst of Elara Capital, does not expect Tata Steel to exit from Riversdale even if Rio acquires it. "The raw material prices are going through the roof and  it is not advisable to exit from strategic investments. At present, the leading steel makers are targeting an uninterrupted supply of raw materials at a moderate cost." Iron ore and coal mine acquisitions have risen recently. These include those made by companies such as Essar, JSW and Adani. Many at a much higher premium than what Rio is offering to Riversdale, say analysts.

The Riversdale stake buy was part of Tata Steel's attempt to secure at least half of Corus's (now Tata Steel Europe) raw material needs. An estimated 1.7 million tonne (mt) a year of coking coal and 300,000 tonne of thermal coal are expected to come from Mozambique. Currently, Corus buys its entire iron ore and coking coal from expensive open market. Experts say if Corus could source iron ore and coking coal from captive mines, the per-tonne cost would fall by 75 per cent and 60 per cent, respectively.

Tata Steel had acquired 24 per cent stake in Riversdale in tranches since 2007. The same year, it bought 35 per cent in two coal tenements of Riversdale in Mozambique. It also signed a $100-million offtake agreement with the miner, which gives Tata Steel the right to buy 40 per cent of coal produced from the two fields. With the production enhancement at Mozambique mines to around 5 mt by 2013, Tata Steel will be able to feed its European operations with around 2 mt coal, say analysts.

Besides, Tata Steel, like other global steel makers, does not like the monopoly of top three miners — Vale, Rio Tinto and BHP Billiton. "They are artificially inflating the iron ore and coking coal prices," says an executive with the company, who did not wish to be identified.

But some also see merit in exiting the investments. "Backward integration may be the key for a steel maker, but it is still not their core business," says an analyst.

Tata Steel's stock, however, is reacting positively to expectations that the company might make a counter bid to Rio Tinto's offer. The stock has risen around 6 per cent since 6 December — the day Rio Tinto's offer came to the public view — to Rs 672.40.

(This story was published in Businessworld Issue Dated 03-01-2011)