Adhunik Metaliks

Low Raw Material Cost Due To Availability Of Captive Mines May Help Save Rs 30 Cr In FY11

 

FOR a steel company, there can't be better news than getting an iron ore mine. The availability of captive mines reduces the raw material cost significantly, thus boosting the company's earnings. 

   This is precisely why the stock of Adhunik Metaliks surged upwards by more than 7% on Friday, on a day when the BSE Metal Index was down by more than 3% and the Sensex declined by close to 0.7%. 

   Adhunik Metaliks, a midsized firm manufacturing different ferrous products such as steel billets, sponge iron and alloy steel, has got the final leg of approval for its iron ore mine located in Orissa. The company is only waiting for the mining lease from the state government, which is expected to take only a couple of months more. The actual mining will start from March 2010 onwards. 

   The iron ore mine has an estimated reserve of close to 20 million tonne. Initially, the company will mine around 20,000 tonne of iron ore every month for an initial period of three to four months. Subsequently, it plans to mine 60,000 tonne of iron ore every month. This translate into an annual production of around 7.2 lakh tonne and will fulfil its entire iron ore requirement for its steel capacity of 3 lakh tonne. 

   Interestingly, the company doesn't have to incur any major capital expenditure for developing this mine. It plans to outsource the entire mining activities to a third party. This will help prevent Adhunik Metaliks from incurring any major cash outflow in the short-term and the earnings figure will also look better in the absence of corresponding depreciation figure. The outsourcing contract will be for one to two years and will be renewed after that. 

   The main benefit from this entire exercise will come in the form of lower raw material cost. The landed cost of iron ore for the company is estimated to be around Rs 450 per tonne. This will result in savings of Rs 1,000-1,500 per tonne of crude steel produced. Considering the company's current steel production of around 3 lakh tonne per annum, the estimated savings in FY11 is around Rs 30 crore. This is significant considering the fact that the company reported a consolidated net profit of Rs 45 crore in financial year 2008-09.