Resurgere Mines

Resurgere Mines & Minerals is entering the capital market on 11^th August 08 with a public issue of 44.50 lakh equity shares of Rs.10 each, in the band of Rs.263 to Rs.272 per share.

The company is into extraction processing and sale of iron-ore and bauxite and has been in the business for the last three years. Till FY 05, the company was carrying out trading activities only and inspite of a turnover of Rs.75 crores, annually, never had a bottomline in excess of Rs.40 lakhs.

The company has taken three iron-ore mines on arrangement to raise iron-ore and subsequently purchase it. These mines are in Orissa and Jharkhand and lease period of two original holders were expired in 1989 and 1999. Even lease of third mine is expiring on 15-04-2009, though renewal applications for all three mines were made by the original lease holders in time, to the government.

Strangely, terms of the agreement of the company with the mine-lease holders have not been spelt-out or given. The company is now acquiring an iron-ore mines, in Sindhudurg, Maharashtra, for which application is under process at the Collector level.

Strangely, the proposed IPO is not to finance the acquisition or development of mines but to acquire processing plant and logistics for its existing activity. Rs.129 crores is earmarked for acquiring Drilling Machines, Pay-loaders, Crushers, for its 4 sites, while Rs.116 crores has been earmarked for purchase of 6 Railway racks.

The company intends to purchase 6 rakes of 61 wagons each, of which, orders for 3 rakes have been placed with Texmaco Ltd., for which, an advance of Rs.15 crore has been made. Under the scheme, on handing over purchased rakes, to the railways, the company would be provided with the assured supply of 4 rakes per month, against each rake and shall be given a freight rebate of 10%. The company shall also be entitled to get additional 2 rakes per month, against each rake, without freight rebate. However, the ownership of these rakes shall remain with the company for a period of 10 years and after that, the same shall be transferred in favour of Indian Railways.

Similarly, under its present contract of extraction and processing, the services of machineries, labour and material resources are outsourced which the company now intends to employ its own equipments.

So the present business model of the company is purely contractual in respect to raw-material mining and processing and dispatch, without having any ownership of fixed assets,. Due to this, the fixed assets of the company as at 31-03-08 are at Rs.2.11 crores on an annual turnover of Rs.425 crores. Total current assets of the company, as at 31-03-08, are at Rs.267 crores, which are largely financed by the networth of Rs.225 crores.

For FY 08, on total income of Rs.425 crores, PAT of the company was at Rs.66.56 crores which has resulted in an EPS of Rs.27.60. Present equity of the company would rise from Rs.24.09 crores to Rs.28.54 crores. This results, in a PE multiple of about 10 times, based on historic earning, and considering issue price at the upper band.

We need to compare the company with Sesa Goa which have its own iron-ore and coal mines and had a turnover of Rs.3,672 crores for FY 08, with PAT of Rs.1,492 crores, resulting in an EPS of Rs.379 on tiny equity base of Rs.39.36 crores. However, June 08 quarter of Sesa Goa has been much better, which had a topline of Rs.1,342 crores and PAT of Rs.633 crores, giving an EPS of Rs.160. This should result in an EPS of over Rs.500 for FY 09. Share price of this company is ruling at Rs.3,300 which implies in a PE multiple of 6.60 times., This is inspite of the fact that the company has proposed bonus issue in the ratio of 1 : 1 as also have gone for stock split from Rs.10 to Re.1, which are perceived as positive moves by the market.

Even otherwise, all other mining stocks are ruling at a PE multiple of less than 10. Prominent amongst them are Ashapura Minechem ruling at Rs.128, having an expected EPS of Rs.15 for FY 09, which results in a PE multiple of 8, GMDC ruling at Rs.256 is expected to have an EPS of Rs.20 for FY 09, which results in a PE of less than 13. Even various ferro alloys manufacturers like Navbharat Ventures, Facor Alloys, Ferro Alloys are ruling at a PE multiple of 5 - 8 times.

In this background, the issue of the company at a PE multiple of 10 is definitely expensive. However, if this is calculated on average earning of last three years, this multiple is at 18 times. Also, difference of atleast 20% between primary and secondary market pricing is always expected.

Also, the business model of the company does not have sound footing, as it is more of trading nature. Post mines acquisition, the things may improve, which will happen on a very low scale. Hence, the earning multiple of over 6 times, on historic earnings looks appropriate. Even track record of the promoters are not assuring at all.

All these warrant a cautious view on the issue, which is definitely expensive and hence advised to avoid.