Tata Steel is not worried about its high debt. According to Koushik Chatterjee, Tata Steel group CFO, the relevant indicator is not debt — net debt was $10.7 billion at the end of September 30, 2010 — but debt/EBIDTA ratio, and the company has a three-point strategy to bring it down.
In an interview, Chatterjee lists them as focus on internal performance, portfolio rejig and infusion of external equity. He also believes that any change in the ownership at Riversdale, will not lead to the Tatas losing control over the Benga assets in Mozambique
Since the acquisition of Corus four years ago, two issues keep coming back: high leverage and lack of raw material. How has been the journey as far as deleveraging the balance sheet is concerned? What is the net debt position and the ideal situation where the Tata Steel group wants to reach and when (targeted)?
Let me give you a sense of our priorities for the last couple of years. Apart from restructuring the operations in Europe and the several initiatives that we have started post the crisis, we have also focused on rebalancing the capital structure and on getting access to raw materials for our European operations. The leverage levels need to be understood with reference to the earnings capability of the company. The relevant metrics are the debt/EBIDTA level. Pre-crisis in 2007-08, Tata Steel’s debt/EBIDTA was around 2.6, which was clearly a very comfortable level.
The global financial crisis impacted the steel industry, especially in western Europe and the US, primarily due to the contraction in demand. Based on several efforts that we undertook, our European operations turned around even though the economic conditions continue to be very volatile along with very high raw material prices. However, we continue to put significant management effort in Europe towards repositioning its cost leadership in western Europe, enhancing the product differentiation in the market.
Given the above background, we have clearly pursued our objective of being financially robust as we prepare for further growth. Therefore, the target capital structure is net debt/EBIDTA ratio of 2.5-2.75. We plan to achieve this through the following strategies:
i) Driving internal performance across all geographies which will increase the group EBIDTA, ii) Portfolio restructuring and iii) infusion of external equity or equity-linked capital.
We have undertaken portfolio restructuring through the sale of minority interests in Southern Steel Berhad, Malaysia, and stake sales of group holdings, raising around $500 million this year. We continue to work on some options like the Teesside sale which is under process with the SSI of Thailand. Consequent to the above, we have already pre-paid around $1.7 billion of debt in the last 12 months.
What are the other means to de-leverage the balance sheet? Tata Steel recently received shareholders’ nod to raise long-term capital. How much will the company raise and how will this money be used?
The leverage will be serviced as and when it is due. Post our recent refinancing in Europe, we do not have any major repayment obligations in the next 18 months. However, we will continue to look at pre-paying debt when we look at allocating discretionary capital.
You need to recognise that we are expanding very significantly in Jamshedpur and also investing in our downstream projects and raw material ventures overseas. Yes, we have indeed received the shareholders’ approval for raising long-term capital. We will disclose the details of the capital-raising programme and the deployment when it is appropriate. The deployment will be done to ensure the best use of capital given the company’s priorities.
How much debt did the company raise for the 3mt expansion in Jamshedpur?
The 3-million-tonne expansion in Jamshedpur will have a capital outlay of around Rs. 15,000 crore, including investments in two coke ovens and expansion of mining capacity and infrastructure. The financial closure was completed on the basis of a long-term debt of around Rs. 9,000 crore. We have so far spend around Rs. 7,000 crore on the project but have not drawn any significant part of the loan as yet as we have focused on using internal capital. From a marginal capital structure point of view, we are in the region of a 1:1 debt equity structure for the project. I think we will be consciously putting much more internal capital and equity than initially envisaged. This will significantly de-risk the overall balance sheet.
The company bought Riversdale, New Millennium and an exploration licence in Ivory Coast. Nothing’s been heard about the Ivory Coast project. Can you give an update?
The Ivory Coast project is a long-term investment and is now at a nascent stage. We are seeing the investment from a long-term perspective as we have to complete the exploration study and also the feasibility study to complete the assessment of the infrastructure spend, especially logistics. Once these studies are completed, we will be in a better position on the timeline and the capital deployment required for the project.
In New Millennium, will you buy into Labmag and Kemag mines as well?
We have a 27 per cent interest in New Millennium and a 80:20 joint venture for the Direct Shipping Ore (DSO) project. The Labmag and Kemag projects are substantially larger than the DSO project and will require significant investments. As the largest shareholder of New Millennium, we will certainly be interested to see the development of Labmag and Kemag projects. We are in discussions with the company on how to take these projects forward.
Moving to Riversdale, what will happen if all the other shareholders sell their shares? Will it become mandatory for the Tatas to sell? Secondly, suppose the Tatas exit Riversdale, will it still be mandatory for Rio to honour the Benga agreement ?
I will try to answer your query more simply — firstly, we are not obligated to sell unless we choose to do so. Secondly, when we entered into a JV with Riversdale in Mozambique, there was no linkage to how much we held at the parent level. In fact, our equity stake at the listed company was very low. As a strategic decision, Tata Steel decided to enhance its stake over time to around 24 per cent at the listed level. Our investments in Riversdale are strategic in nature and the development of the Benga tenements through the joint venture will be governed by the agreement between Riversdale and Tata Steel.
Why haven’t we seen any more acquisition of mines in the last 2-3 years?
As a principle, we have been early investors in new mining projects overseas. This gives us a better trajectory of value creation over the long term instead of acquiring operating mines at skewed valuation levels, given what is happening to the mining industry globally. This is based on our primary requirement to get raw materials at implied costs that creates economic value. We are also not merely investors but will like to play the strategic partner’s role by bringing in our mining capability to assist these projects given our long history of mining.
In an interview, Chatterjee lists them as focus on internal performance, portfolio rejig and infusion of external equity. He also believes that any change in the ownership at Riversdale, will not lead to the Tatas losing control over the Benga assets in Mozambique
Since the acquisition of Corus four years ago, two issues keep coming back: high leverage and lack of raw material. How has been the journey as far as deleveraging the balance sheet is concerned? What is the net debt position and the ideal situation where the Tata Steel group wants to reach and when (targeted)?
Let me give you a sense of our priorities for the last couple of years. Apart from restructuring the operations in Europe and the several initiatives that we have started post the crisis, we have also focused on rebalancing the capital structure and on getting access to raw materials for our European operations. The leverage levels need to be understood with reference to the earnings capability of the company. The relevant metrics are the debt/EBIDTA level. Pre-crisis in 2007-08, Tata Steel’s debt/EBIDTA was around 2.6, which was clearly a very comfortable level.
The global financial crisis impacted the steel industry, especially in western Europe and the US, primarily due to the contraction in demand. Based on several efforts that we undertook, our European operations turned around even though the economic conditions continue to be very volatile along with very high raw material prices. However, we continue to put significant management effort in Europe towards repositioning its cost leadership in western Europe, enhancing the product differentiation in the market.
Given the above background, we have clearly pursued our objective of being financially robust as we prepare for further growth. Therefore, the target capital structure is net debt/EBIDTA ratio of 2.5-2.75. We plan to achieve this through the following strategies:
i) Driving internal performance across all geographies which will increase the group EBIDTA, ii) Portfolio restructuring and iii) infusion of external equity or equity-linked capital.
We have undertaken portfolio restructuring through the sale of minority interests in Southern Steel Berhad, Malaysia, and stake sales of group holdings, raising around $500 million this year. We continue to work on some options like the Teesside sale which is under process with the SSI of Thailand. Consequent to the above, we have already pre-paid around $1.7 billion of debt in the last 12 months.
What are the other means to de-leverage the balance sheet? Tata Steel recently received shareholders’ nod to raise long-term capital. How much will the company raise and how will this money be used?
The leverage will be serviced as and when it is due. Post our recent refinancing in Europe, we do not have any major repayment obligations in the next 18 months. However, we will continue to look at pre-paying debt when we look at allocating discretionary capital.
You need to recognise that we are expanding very significantly in Jamshedpur and also investing in our downstream projects and raw material ventures overseas. Yes, we have indeed received the shareholders’ approval for raising long-term capital. We will disclose the details of the capital-raising programme and the deployment when it is appropriate. The deployment will be done to ensure the best use of capital given the company’s priorities.
How much debt did the company raise for the 3mt expansion in Jamshedpur?
The 3-million-tonne expansion in Jamshedpur will have a capital outlay of around Rs. 15,000 crore, including investments in two coke ovens and expansion of mining capacity and infrastructure. The financial closure was completed on the basis of a long-term debt of around Rs. 9,000 crore. We have so far spend around Rs. 7,000 crore on the project but have not drawn any significant part of the loan as yet as we have focused on using internal capital. From a marginal capital structure point of view, we are in the region of a 1:1 debt equity structure for the project. I think we will be consciously putting much more internal capital and equity than initially envisaged. This will significantly de-risk the overall balance sheet.
The company bought Riversdale, New Millennium and an exploration licence in Ivory Coast. Nothing’s been heard about the Ivory Coast project. Can you give an update?
The Ivory Coast project is a long-term investment and is now at a nascent stage. We are seeing the investment from a long-term perspective as we have to complete the exploration study and also the feasibility study to complete the assessment of the infrastructure spend, especially logistics. Once these studies are completed, we will be in a better position on the timeline and the capital deployment required for the project.
In New Millennium, will you buy into Labmag and Kemag mines as well?
We have a 27 per cent interest in New Millennium and a 80:20 joint venture for the Direct Shipping Ore (DSO) project. The Labmag and Kemag projects are substantially larger than the DSO project and will require significant investments. As the largest shareholder of New Millennium, we will certainly be interested to see the development of Labmag and Kemag projects. We are in discussions with the company on how to take these projects forward.
Moving to Riversdale, what will happen if all the other shareholders sell their shares? Will it become mandatory for the Tatas to sell? Secondly, suppose the Tatas exit Riversdale, will it still be mandatory for Rio to honour the Benga agreement ?
I will try to answer your query more simply — firstly, we are not obligated to sell unless we choose to do so. Secondly, when we entered into a JV with Riversdale in Mozambique, there was no linkage to how much we held at the parent level. In fact, our equity stake at the listed company was very low. As a strategic decision, Tata Steel decided to enhance its stake over time to around 24 per cent at the listed level. Our investments in Riversdale are strategic in nature and the development of the Benga tenements through the joint venture will be governed by the agreement between Riversdale and Tata Steel.
Why haven’t we seen any more acquisition of mines in the last 2-3 years?
As a principle, we have been early investors in new mining projects overseas. This gives us a better trajectory of value creation over the long term instead of acquiring operating mines at skewed valuation levels, given what is happening to the mining industry globally. This is based on our primary requirement to get raw materials at implied costs that creates economic value. We are also not merely investors but will like to play the strategic partner’s role by bringing in our mining capability to assist these projects given our long history of mining.
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