Sesa Goa stock gets ‘buy’ rating

The Supreme Court has directed the government of Karnataka to allow iron ore exports from the state from April 20. Although we await full details of the order,this is a positive development for Sesa Goa,which has c.6m tonnes (25% of total capacity) of iron ore mining capacity within Karnataka. This is likely to improve visibility and assuage investor concerns about Sesa’s iron ore volume growth,which remains a key stock price driver. Sesa trades at a 23% discount to global peers. We maintain our Buy rating with a target price of R360 per share.

Sesa is now targeting c.7-8m tonnes of iron ore export volumes from Karnataka in FY12,including the sale of inventories there —2.3m tonnes as of December 2010. As things stand,we estimate an incremental c.2.5mt of ore sales from Karnataka and an incremental Ebitda of $50m in FY12. This is also likely to be a strong positive for stock sentiment.

Iron ore spot prices have risen by 33% since July 2010,when the export ban was announced. The resumption of exports from Karnataka (30mt in FY10) is likely to put some downward pressure on spot iron ore prices.

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With the Cairn acquisition acting as a key overhang,Sesa’s share price has broken its historically strong correlation with spot iron ore prices,with the two diverging significantly. While iron ore spot prices are up 23%,Sesa’s stock price is down 11% since August 2010. We firmly believe that this disconnect further illustrates that the stock price underperformance is primarily driven by deteriorating sentiment.

With improving visibility on volume growth,we believe that a 23% discount to the global miners is excessive,and we expect this discount to narrow as we move into FY12.

—Deutsche Bank