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.