Sesa Goa: Sharp iron ore price rise augurs well for company

Sesa Goa, a dominant player in the iron ore and allied commodities segment, benefited from a sharp rise in iron ore prices during the quarter to December 2010. 

Global iron ore traded at an average price of $160 per tonne in the third quarter, a nearly three-fifth jump compared with a year ago, and that helped Sesa Goa offset the fall in the commodity's sales volume. Iron ore is a key input for the steel industry. The company's consolidated revenue rose 20% year-on-year to 2,250 crore in the quarter, but that could not prevent a 700 basis points fall in its operating profit margin to 55%. Also, the 20.6% year-on-year fall in iron ore volumes sold resulted in the slowest growth in quarterly net sales during the current financial year.

Sesa Goa also had to grapple with a higher cost structure, like logistics at its mines in Goa, and that led to a fall in its operating margins. The company's iron ore output in the quarter was also curtailed due to unprecedented monsoons in Goa last year. However, higher realisations helped net profit rise 29% year-on-year during the third quarter to 1,065.3 crore. The results were declared after the close of Monday trade, and on Tuesday, the stock ended 1.3% lower at 326. Global iron ore prices have gone up further over the last few weeks and reports indicate spot prices at close to $ 180 per tonne levels. The current price is not too far from the all-time high of $ 200 per tonne seen in early 2008, say analysts. 

The rise in iron ore prices comes when demand from the steel industry in emerging markets has been strong and flooding is likely to disrupt supplies from Australia in the short term. Media reports indicate that global suppliers of iron ore are shifting to more short-term, monthly contracts compared with the traditional quarterly contracts, to get better realisations. This positive outlook for iron ore prices should help drive realisations and net profit at Sesa Goa over the next few quarters.