Resurgere Mines and Minerals IPO Analysis

Promoted by Subhash A Sharma and his wife, Resurgere Mines and Minerals (RMMIL) is in the business of extraction, processing and sale of mineral products and exploration and development of mining assets. The product range includes various forms of iron ore such as Lump ore, Size ore, Calibrated Lump ore (CLO) and iron ore fines etc. and bauxite. The company sells all these products domestically except iron ore fines, which the company exports to China.

The company currently operates in Nuagaon, Kendujhargarh district (Reserve - 12.37 million tonnes) and Maharajpur, Mayurbhanj district (Reserve - 42.08 million tonnes) in Orissa and is expected to commence operations at Tatiba mine in Singhbhum district of Jharkhand (Reserve - 20.37 million tonnes) in the near future. The company has entered in to long-term contracts for these mines, Nuagoan, Tatiba and Maharajpur, with the leaseholders for raising and purchasing of iron ore. All the three mines carry high quality iron ore of about 62% - 64% Fe content.

The present operations at the Nuagoan Mines and the Jharkhand Mines are being carried out under deemed renewal provisions since the respective Mining Leases have expired, prior to the expiry whereof the respective applications for renewals of the Mining Leases have been made to the State Government and are pending consideration.

The company has also made an application to the Collector of Sindhudurg district for the grant of an iron ore mining lease over an area of 108.77 hectares in village Banda, District Sindhudurg in Maharashtra, wherein company's application is under process. The company has also applied for two prospecting leases of iron ore in Banda region to the Collector of Sindhudurg district.

Furthermore the company is also engaged in merchant export of iron ore fines to China.

Through its wholly owned subsidiary M/s. Warana Minerals Private (WMPL), the company holds 60% interest in a registered partnership firm, Shri Warana Minerals which is engaged in the business of mining bauxite ore under the 30 year mining lease with respect to a bauxite mine situated in Yelwan Jugai, Maharashtra.

The mining assets of the Company, except Banda mine, have cumulative estimated reserve of 74.82 million tonnes of iron ore and 4.92 milllion tonnes of bauxite as certified by Central Mining Research Institute.

RMMIL proposes to enter the capital markets with a public issue of 4450000 Equity shares of Rs 10 each through 100% book building process. The price band has been fixed at Rs 263 to Rs 272 per Equity share of Rs 10 each.

The Company proposes to utilize the net proceeds of the Issue to part finance its plan for purchase of Plant and Machinery valued at Rs 128.56 crore for setting up of its own extraction and crushing facilities at the mines and purchase of 6 railway rakes worth Rs 116.36 crore to set up own logistics infrastructure facilities, besides meeting margin money requirement for working capital (Rs 18.25 crore), Provision for contingencies and Pre Operative expenses (Rs 8.24 crore), General corporate purpose (Rs 10 crore) and Issue expenses.

Besides the proceeds of the issue, the Company proposes to finance the cost through term loans of Rs 86 crore to be raised from banks, Rs 43 crore through Private Equity funding from Merrill Lynch International and Rs 13.75 crore through Pre-IPO allotment.

Merrill Lynch International holds 3000000 Equity shares, India Business Excellence Fund-I holds 910000 Equity shares, IL&FS Trust Co. (Trustees of Business Excellence Trust-India Business Excellence Fund) hold 402500 Equity shares, Mr Motilal Oswal hold 250000 Equity shares and Mr. Raamdeo Agarwal holds 200000 Equity Shares in the Company.

On Dec.'07, Merrill Lynch International has been allotted 3000000 shares of the Company for a total consideration of Rs 63 crore (Rs 210 per share). On Feb'08, IL&FS Trust Co. (Trustees of Business Excellence Trust-India Business Excellence Fund) and India Business Excellence Fund I subscribed to 550000 Equity Shares at Rs 250 per Equity Share for a total consideration of Rs 13.75 crore. Mr Motilal Oswal hold 250000 Equity shares and Mr. Ramdeo Agarwal holds 200000 Equity Shares in the Company at a price of Rs 210 per share

Strengths

• The iron ore industry is currently in the midst of favorable conditions, on the back of robust demand scenario. However prices are already high and may be near the peak of the cycle.

Weaknesses

• The company is operating on mines wherein the lease has either already expired or is about to expire in a short period of time. The mining leases of Nuagaon and Tatibha have already expired, while that of Maharajpur is due for expiry in April 2009. Even though the applications for renewal have already been made, the possibility of non-renewal in favour of existing leaseholders cannot be ruled out.

• The company's selling strategy has been to sell only in the spot market and it sells most of its output to traders, hence, it currently does not enjoy any long-term relationship with any of its buyers. This also exposes the company to volatility in spot prices.

Valuation

At a price band of Rs 263– 272, RMMIL's P/E works out to 11.3 – 11.7 times FY 2008 earning on post-IPO equity. Sesa Goa, which is a leading company within the sector, trades at P/E of 8.4 times FY 2008 earnings.

Austral Coke & Projects - IPO

Investors can avoid investment in the initial public offering (IPO) of Austral Coke and Projects Ltd., considering the high execution risks and cyclical nature of the business, though prospects for volume growth are bright.

At Rs 196 (upper end of the price band), the offer is priced at 13-15 times the expected 2007-08 earnings per share, computed on the post-offer equity base. This is almost on a par with the valuation enjoyed by Gujarat NRE Coke, which has a larger scale of operations now.

The Kolkata-based Austral Coke is mainly into the manufacture of low ash metallurgical coke (LAMC) and refractories, apart from equipment rental and textile trading.

The company plans to use the IPO proceeds to finance its expansion in coke manufacturing facilities, acquisition of coal mining licences in India and abroad, prepaying debt and setting up an 8 MW captive power plant.

The expansion project is proposed to be financed almost entirely through this offer. Only about 2 per cent of the total outstanding debt is sought to be pre-paid through the proceeds of the IPO.
Financials

Austral Coke registered revenues of Rs 274 crore, with net profits of Rs 35.17 crore in the 11-months ended February 2008 (full year numbers are not disclosed).

However, only 45 per cent of these revenues (Rs 124 crore) came from manufacturing operations, the rest came from textile trading, equipment rentals and other businesses.

The company's track record in coke manufacture is relatively short and in the three years since 2004-05, the company managed revenue CAGR of 88 per cent in the manufacturing business, while net profits (before extra ordinary items) expanded from Rs 2 crore to about Rs 35.2 crore.

Demand potential for LAMC appears quite good in the light of the ongoing capacity expansion in the steel and cement sectors. The domestic demand for the product has been met significantly by imports, with Gujarat NRE Coke being the only large domestic player in this business.

However, the business is cyclical, with coke prices being highly sensitive to demand from user industries. Prices of coking coal, a key input, are also subject to sharp swings, making for a volatile earnings record for companies in this business.

According to the offer document, the company, which is now producing 1.75 lakh mtpa (metric tonnes per annum) of coke has recently added another 2 lakh mtpa in 2008. This IPO is set to fund another expansion of 1.50 lakh mtpa.

The rapid scaling up of capacities within a short period poses execution risks, as results of even the second expansion are not yet available. Austral has entered into an MoU with a group company — Gremach Infrastructure Equipment & Projects Ltd — for prospecting, mining and commercial activities in Mozambique.
Business risks

Apart from generic issues such as cyclicality of the met coke and steel industries and fluctuations in the international prices of inputs, there are company specific challenges such as lack of forward integration and execution risks. In the coal mining and equipment rental businesses, there are potential conflicts of interest with group companies also engaged in this line of activity.

The proposed coke project site is in red category zone of the Pollution Control Board. The offer document states that in the case of any environmental/other policy issue, the management may decide about the relocation of the project site.
Issue Details

The issue opened on August 7 and closes on August 13 and the issue size is Rs 119-142 crore. The price band is Rs 164-196.

Grey Market Premiums - Austral Coke

 Vishal Information Technologies 140 to 150 3 to 5

NU TEK India Ltd. 170 to 192 6 to 8

Austral Coke & Projects 164 to 196 20 to 22

Reliance Infratel IPO to be deferred

Anil Ambani group firm Reliance Infratel is likely to defer its IPO plans as Sebi's go ahead for the issue is set to expire soon, making it the third major IPO deferment after that of commodity exchange MCX and mutual fund house UTI AMC.
Sebi had issued observation on the IPO of Reliance Infratel, the telecom infrastructure division of Reliance Communications, on 12 May. As per the regulations, a company is required to close the IPO within 90 days of issuance of Sebi's observation on the draft red herring prospectus (DRHP)—the period which ends on 11 August .
When contacted Reliance Infratel officials declined to comment.
Meanwhile, Reliance ADAG chairman Anil Ambani on 31 July had said, "We have received the approvals on the red herring prospectus... The volatility in global and Indian capital markets is what we are watching. A decision would be taken at an appropriate time."
"When we find an appropriate time, I am sure that we will proceed both with Globalcom and Reliance Infratel," Ambani added.
Reliance Infratel builds, owns and operates telecom towers and related assets at designated sites. It also offers these passive telecom infrastructure assets on a shared basis to wireless service providers and other communications service providers under long-term contracts.
Earlier, the IPO of MCX and that of UTI Asset Management, were deferred due to volatile market conditions.
MCX is believed to be reviving the process of its initial public offer and may file a new draft prospectus with the market regulator Sebi by the middle of this month.