*Citi: Jindal Steel and Power (JNSP.BO) - Supreme Court Committee Clears Sarda Mines*
*SC appointed committee clears Sarda Mines of charges*
According to press reports (Economic Times, 7th November 2019), the Supreme Court appointed committee (to investigate various miners on charges of violating regulations in Odisha) has cleared Sarda Mines from charges of illegal mining.
*Background*
The mentioned committee (comprising former SC judges Justice Anil R Dave and Justice GS Singhvi) was asked to investigate ~ 15 lessees which had been accused of either having transferred control or holding mining rights in excess of permissible limits by the SC through an order dated November 22, 2017. The committee has held that Sarda Mines did not violate Rule 37 of the Mineral Concession Rules, 1960.
*Implications for JSPL*
JSPL had earlier been sourcing iron ore from Sarda Mines for its Barbil pellet plant. Sarda Mines have JSPL’s inventory of 11-12 mnt of iron ore fines (valued at approximately Rs22bn-24bn i.e. Rs22-Rs24/share for JSPL). If the Supreme Court allows, JSPL will be able to use the raw material at nil incremental cost which could lead to a significant earnings boost over the medium term.
*Reiterate Buy, cash flows have already improved*
JSPL’s FY19 Annual Report showed strong operating cash flow generation despite capacity under-utilization, improvement in working capital and continuing debt pay-down. In 1HFY20, as highlighted earlier (Jindal Steel and Power (JNSP.BO) - Broadly In-line 2Q; Strong Cash Flow and Debt Paydown) 1) Cons operating cash flow was Rs52.4bn v/s P&L EBITDA of Rs38bn on WC tightening and receipt of advances against exports 2) Capex was Rs4bn 3) Cons net debt fell Rs26bn (including forex MTM). JSPL’s cash flows have already improved and there is ample scope for volumes, EBITDA and cash flows to improve further over the medium term. Valuation at 0.4x P/BV appears attractive. Reiterate Buy.