Billionaires Halt Mining Deals on Rupee Erosion

Billionaires Halt Mining Deals on Rupee Erosion: Corporate India

Indian billionaires led by Kumar Mangalam Birla are stalling purchases of mines overseas as the rupee’s 13 percent drop this year inflates the cost of deals. The Aditya Birla Group, which runs the nation’s second-biggest copper and aluminum maker, has put acquisition plans on hold, said a person with direct knowledge of the matter. JSW Steel Ltd. (JSTL), controlled by the billionaire Jindal family, would prefer to wait, Commercial Director Jayant Acharya said.“It won’t be easy to make decisions on merger and acquisitions in such a volatile environment,” Acharya said in an interview. “Calls need to be made in a measured manner.”

Indian companies spent $12.7 million on mining assets abroad this year, the lowest amount since at least 2008, as the rupee’s tumble made it Asia’s second-worst performer. Companies that have refrained from overseas purchases risk facing higher import costs for raw materials should the rupee weaken further because of India’s record current-account deficit.

JSW, India’s third-largest steelmaker, was looking to buy coking coal mines overseas to feed its annual 14 million metric ton capacity in the country, Chairman Sajjan Jindal said in May. The company in July got shareholder approval to raise its borrowing limit to 400 billion rupees ($6.3 billion) from 250 billion rupees to fund expansion and acquisitions.

Aborted Efforts

The Aditya Birla Group, which is scouting for iron ore, coal and copper ore assets outside India, had bid through wholly-owned unit Essel Mining Ltd. for Northern Iron Ltd. (NFE), an Australian miner of iron ore. Essel later ended the effort, Northern Iron said in a statement in November.

The group had also sought to buy Australian coal producer New Hope Corp., two people with direct knowledge of the matter said in December 2011. New Hope ended the sale process after talks with potential buyers didn’t fetch an offer reflecting the company’s value, Chairman Robert Millner said March 2012.

Aditya Birla Group spokeswoman Pragnya Ram declined to comment on the pace of overseas acquisitions.

“Deals could slow down further as assets have become more expensive,” said Ketan Shaah, executive director and head of investment banking at Daiwa Capital Markets India Pvt. in Mumbai. “Financing has also become more difficult.”

Average dollar debt costs for Indian companies jumped to a 19-month high of 6.32 percent on Aug. 22 from a record low of 3.76 percent, indexes compiled by HSBC Holdings Plc show.

‘Big Risk’

A weaker rupee is weighing on producers of electricity, coal and metal as shrinking industrial output squeezes profit margins and strains finances. India’s gross domestic product grew 4.4 percent in the three months through June 30 from a year earlier, after increasing 5 percent in the year to March 31, the smallest gain since 2003.

Any “external shock” could sink the rupee past 70, Arvind Virmani, an adviser on the Reserve Bank of India’s panel on monetary policy, said on Sept. 3. The rupee touched an unprecedented low of 68.845 a dollar on Aug. 28 and has rebounded about 9 percent since.

The fall in the currency in “such a short time is a big risk” and companies in the middle of talks “will have to recalculate their economics,” said Prasun Kumar Mukherjee, executive director at billionaire Anil Agarwal-controlled Sesa Goa (SESA) Ltd.

Cash Flow

The weakening rupee has exacerbated hurdles in the way of mining acquisitions including falling commodity prices and court-ordered bans and restrictions.

Cash flows of some mining-related companies have dwindled by about 50 percent, impeding their ability to raise loans, said Ravi Shankar, managing director and head of investment banking in India at UBS AG.

Revenue from the iron ore business at Sesa Goa, which was India’s biggest exporter till mining and shipments were banned in the western state of Goa where it produced more than 80 percent of the commodity, fell after sales plunged to 3.1 million metric tons in the year ended March 31, the least since Agarwal bought the company in 2007. Sales at state-owned NMDC Ltd. (NMDC), the nation’s biggest miner of the ore, may decline for a third consecutive fiscal year, according to the median estimate of 35 analysts compiled by Bloomberg.

“Where there’s so much uncertainty in the operations, relying on that cash flow to take a loan and fund equity of a mine abroad becomes that much difficult,” Shankar said.

Expensive Imports

Shares of NMDC have plunged 25 percent, while that of Sesa declined 5 percent this year. Sesa shares climbed 42 percent since close of trade on Aug. 16 after saying it absorbed Sterlite Industries (India) Ltd., another unit of the London-listed Vedanta that produces aluminum and copper. The benchmark S&P BSE Sensex has gained 2.2 percent this year.

Indian power utilities including NTPC Ltd. (NTPC), Tata Power Co. and Adani Power Ltd., are increasing imports of coal, which fuels about 60 percent of the country’s electricity generation. A decline in the rupee is making these imports more expensive.

More than 10,000 megawatts of new capacity in India is lying idle, according to the Association of Power Producers, and generators including Reliance Power Ltd., Adani Power and NTPC have halted some 50,000 megawatts of projects combined, citing fuel constraints.

Rupee Volatility

Spot iron ore at Tianjin port in China rose 41 percent in the past year to $135.2 a ton on Sept. 10. Prices rose more than 67 percent in the first five months, followed by a 31 percent decline in the next three before recovering 25 percent, according to a price index compiled by The Steel Index Ltd., owned by McGraw-Hill Financial Inc. The 100-day volatility at 33 in January was the highest level since September 2009, according to data compiled by Bloomberg.

One-month implied volatility in the rupee, a measure of expected moves in the exchange rate used to price options, surged 508 basis points this quarter, or 5.08 percentage points, the most since the three months through September 2011. The rate touched 22.4 percent on Sept. 4, the highest since December 2008.

“The rupee continues to face challenges,” said Devendra Pant, chief economist at India Ratings & Research, the local unit of Fitch Ratings. “Only if it is a good asset at a really low price, there may be interest from India.”

To contact the reporters on this story: Abhishek Shanker in Mumbai at; George Smith Alexander in Mumbai at

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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