Goa halts iron ore mining; Sesa, Sterlite shares hit

A labourer works in an iron factory on the outskirts of Hyderabad July 8, 2010.

MUMBAI (Reuters) - Goa temporarily halted iron ore mining from Tuesday to check if operations were legal, a move that is expected to further dent exports from India and support flagging global prices.

Shares in miners, such as Sesa Goa and Sterlite Industries, fell more than 5 percent on worries over cuts to output and exports by India - the world's former No. 3 supplier of the steelmaking ingredient.

India's iron ore exports, which mainly head to China, have already halved because of government taxes aimed at keeping output for the domestic steel industry and efforts to stop illegal mining.

Tumbling global prices, down a third since July and now near levels last seen in 2009, have also deterred exports.

The move by Goa to suspend mining activities came after an expert panel formed by the central government found "serious illegalities and irregularities" in mining operations.

State officials in Goa, India's second-biggest iron ore producer which normally supplies about 50 million tonnes a year, said the inquiry could take several weeks while industry sources suggested it might be months.

"We are trying to do it with priority and we will expedite everything," said Prasanna Acharya, director of mines and geology in Goa's mines department, declining to give a time frame for the checking process.

The state will set up a committee to review mining before giving approval to resume operations. Iron ore already produced or stored at ports can be moved, the government said in a order late on Monday.

"Our contacts in India say they expect this to last not more than one to two months," said Graeme Train, commodities analyst at Macquarie in Shanghai. "As soon as the mines show that they have all the permits then they can just start producing again."

MINING SHARES DROP

Sesa Goa, which gets most of its iron ore from Goa, said business would suffer but it hoped the halt would be short-lived. Its shares fell as much as 7 percent on Tuesday.

"There will be a delay in operations. We are hopeful this impasse will end fast. It is monsoon and not much production happens at this time, but there will be a slight impact in the near term. We hope to make up in the rest of the year," Sesa spokesman R Krishnagopal said.

Shares of non-ferrous metals producer Sterlite, which is set to merge with Sesa Goa to create Sesa Sterlite -- the eventual umbrella unit for other subsidiaries of the Vedanta Group, were 4.6 percent lower at 94 rupees.

Margins for miners in Goa have been hit hard as a 30 percent export tax, high freight rates and low global iron ore prices have made shipments unviable.

Also, operations usually slow during the June-to-September monsoon season as rains hamper mining and transportation.

"The suspension ... albeit temporary, is likely to exacerbate the decline in Indian iron ore exports and provide an upside trigger to spot iron ore prices," Deutsche bank analysts said in a research note.

Exports from neighbouring Karnataka, which together with Goa sells about 75 million tonnes a year overseas, remain stalled as it has failed to comply with a Supreme Court order to lift a ban on shipments, introduced to curb illegal mining in the state.

Shares of JSW Steel, which uses iron ore in steel making, fell as much as 2.4 percent on worries the Goa halt would further dent domestic supplies. Steel makers in India have been operating below capacity due to lack of raw materials.

In the seven months to July, India remained the third biggest exporter of iron ore to top market China, but volume dropped by 44 percent to 30 million tonnes.

But in July alone, South Africa edged out India in terms of exports to China, with shipments of over 4 million tonnes versus India's 2.5 million tonnes.

"Overall the impact (of the Goa halt) looks like it's going to be quite limited. It doesn't look like this is shaping up to be another Karnataka," Train said.

(Additional reporting by Abhishek Vishnoi, Prashant Mehra and Manoj Dharra in MUMBAI and Manolo Serapio Jr. in SINGAPORE; Editing by Jo Winterbottom and Himani Sarkar)