Markets

Sesa Goa focuses on the global seaborne trade in iron ore which caters to the import demand of various countries, especially China. Seaborne iron ore trade increased by 7.3% to 973 million tonnes in 2010. Chart F plots its growth over the last 10 years when it registered a compound annual growth rate (CAGR) of 9.1%.

During the last decade, China has emerged as the world's leading producer of steel. However, it relies on imports to substantially meet its ore needs. Chinese imports of iron ore have increased at a CAGR of 23% from 92 million tonnes in 2001 to 594 million tonnes in 2010. With this growth, its share in global iron ore imports has risen from 20.7% in 2001 to 61.1% in 2010.

In 2010, Chinese import of iron ore reduced by 3.7% in terms of volume. Much of this was on account of supply side constraints in major iron ore producing countries. Brazil suffered from production shortfalls due to heavy rainfall; while in India, exports were banned from the state of Karnataka. Both these countries are also facing several environmental restrictions in increasing iron ore supplies. In addition, development of port capacities and inland logistics in Brazil and India has not been in pace with growing requirements of the seaborne iron ore trade.

In an environment of strong demand, these supply-side constraints resulted in a steady increase in iron ore prices. Chart G shows how prices have risen since Q2, 2010-11.

Table 2 gives the regional distribution of the Company's Source: My Steel sales. While China remains the core geography, the Company is focusing on developing other markets. With the growth in the domestic Indian steel industry, there is a growing emphasis on domestic iron ore sales. India's share of Sesa Goa's total iron ore sales has risen from 6% in 2009-10 to 10% in 2010-11. Similarly, the share of Japan and Korea has increased from 7% to 10%.

Table 2: Share of Sesa Goa's Total Iron Ore Sales

	2010-11	2009-10
China	77%	85%
Europe	2%	2%
Japan & Korea	10%	7%
India-Domestic	10%	6%
Others	1%	-

Regulatory Issues

The performance could have been even better had it not been for some regulatory issues that affected both volume growth and profitability of the iron ore business in 2010-11, to which we now turn.

Karnataka Export Ban

In order to curb illegal mining, the state government of Karnataka imposed a temporary ban on iron ore exports from its ten minor ports since end July 2010. Consequently, a group of miners including Sesa Goa, approached the High Court of Karnataka to revoke this ban. After the hearing, the High Court provided six months for the state government to enforce requisite regulations to mitigate illegal mining. To get faster resolution, this order was further challenged in the Supreme Court.

The Supreme Court heard the matter on 12th February, 2011. It stated that the ban could not be for an indefinite period and directed the government of Karnataka to frame new rules for controlling illegal mining by 31st March, 2011. Meanwhile, it directed the state government to allow the exports of iron ore lying at major ports.

On 5th April, 2011, the Supreme Court passed its interim order staying the government ordinance on issuance of Mineral Despatch Permits for exports by the state of Karnataka with effect from 20th April, 2011.

Export Duty Structure

On 28th February, 2011, Government of India raised export duty on both lumps and fines to 20%. The effect of this was restricted to only the month of March in 2010-11, but going forward this will adversely affect margins.

Operations

The regulatory issues discussed above made it difficult to increase production and sale of iron ore. In addition, there were natural disruptions like extended monsoons in Goa. Sesa Goa launched several internal operational initiatives to overcome these adversities. These have helped the Company to produce 18.8 million tonnes of iron ore (21.1 million tonnes on a WMT basis), which is almost in line with the 19.2 million tonnes (21.4 million tonnes on a WMT basis) of the previous year.

Sesa Goa operates mines in Goa and Karnataka. While for most of the mines, the Company has direct ownership in the form of mining leases from the state governments, some of these are under thirdparty operations. Table 3 gives the Company's production data across different states.

Table 3: State-wise production volumes (in million tonnes)

	2010-11	2009-10
Goa	14.4	13.8
Karnataka	3.0	3.7
Orissa	1.4	1.7
Total	18.8	19.2

Note: As international sale prices are quoted in dry metric tonne (DMT), all our iron ore volumes are reported on a DMT basis, versus the earlier basis of wet metric tonne (WMT).

The third-party mining contract for the Thakurani Mine in Barbil, Orissa expired on 30th November, 2010. Sesa Goa did not renew the mining contract because of unviable commercial terms. Thus, the Company has ceased its mining operations at the Thakurani mine from 1st December, 2010. With this, the Company has no mining operations in Orissa.

Iron Ore Mining: A Progress Report

A number of initiatives are being undertaken to expand mining capacity and logistics at Goa and Karnataka. The goal is to increase production at Goa and Karnataka to 40 mt. These include additional investment in mining equipment, processing plants, barges, land and infrastructures at an estimated capital expenditure of around US$500 million.

We have made substantial progress on the logistics capacity: with a new railway siding already commissioned in Karnataka and work progressing on widening of the existing roads and building dedicated road corridors in both Karnataka and Goa.

We are also adding capacity in river and port logistics with five new barges already on stream.

Exploration

Any natural resource based business with long term growth priorities must be backed by strong exploration skills and efforts. At Sesa Goa, the exploration initiatives are driven by its focus on sustainable growth. With this objective, the Company is continuously looking to add more resources through exploration, acquisitions and also through new mine leases.

During 2010-11, six drilling rigs were deployed across leases in Goa and Karnataka. By 31st March, 2011, over 68,900 metres were drilled. This resulted in a gross addition of 53 mt to the Company's reserves, and resources base prior to a depletion of 21 mt in 2010-11. Table 4 gives the last three years resource addition and depletion.

Table 4: Sesa Goa's Iron Ore Reserves & Resources (R&R), are in million tonnes

	Gross Addition	Depletion	Acquisition	Total R&R
2008-09	54	16	-	240
2009-10	64	21	70	353
2010-11	53	21	-	306

Note: Total R&R at the end of 2010-11 is excluding Orissa mine which was included in earlier years.

As on 31st March, 2011, total reserves and resources at the mines that the Company held on lease and/or right to mine stood at 306 million tonnes. The reserves and resources position has been independently reviewed and certified as per Joint Ore Reserves Committee (JORC) standards.