Buying a one-million tonne steel plant of Zimbabwe Iron & Steel Company (Zisco) may seem a small acquisition for any steel player, but for Essar it has turned out to be a goldmine.
Once the deal is completed, Essar will have access to probable iron-ore reserves of 20-25 billion tonnes, which are enough to last its current steel capacity for a thousand years.
With its steel capacity reaching 14 million tonnes next year, Essar Steel needs close to 23 million tonnes of iron ore per year. It takes 1.6 tonnes of iron ore to make one tonne of steel.
Sources close to the Essar-Zisco deal confirmed that Buchwa Iron Mining Company (Bimco), a subsidiary of Zisco, potentially has 25 billion tonnes of iron-ore reserves.
And, with Essar selected as the preferred bidder by the Zimbabwean government on Tuesday to own 60 per cent stake in the company, it naturally gets access to the reserves that could easily meet its current ore needs.
The caveat, however, is that the reserves of 25 billion tonnes are only probable and it will take time and investment over a period of years to derive the actual quantum of proven reserves.
Essar refused to officially comment on the actual reserves of Zisco. Essar Steel, in its release to the media had only stated that Zisco is a fully-integrated steel plant with its own iron ore mines and limestone.
Zisco's probable ore reserves, if proven, will place Essar in the top league among its Indian peers which have all intensified their global search for raw materials over and above their reserves in India. Naveen Jindal-led Jindal Steel and Power has access to 20 billion tonnes of iron ore in the El Mutun mines in Bolivia. JSW Steel, through its Chilean iron ore mines in Bella Vista has access to 600 million tonnes and exploration at Vinita mines are currently on.
Tata Steel, which has a 100 per cent off-take agreement with New Millenium Corp for its Canada ore project, has access to 64 million tonnes of ore. Apart from that, the company has bought an equity stake in a South African mine that gives it another 50 million tonnes of iron ore.
Its joint venture with state-owned SODEMI in Ivory Coast is expected to give it another 20 million tonnes of iron ore a year.
The world's largest steelmaker, Arcelor-Mittal, which produced 73 million tonnes steel in 2009, has 19 billion tonnes of proven iron-ore reserves.
However, this number will significantly escalate once reserves from its other mines are proven and accounted for.
At present, Vale, the world's largest iron ore supplier has proven reserves of 10 billion tonnes and probable reserves of another 6 billion tonnes. Rio Tinto, the world's third-largest iron ore miner, has proven reserves of 2.5 billion tonnes. Many industry experts said the probable reserves with Vale, Rio Tinto and ArcelorMittal were much more than the actual proven reserves.
"These companies constantly keep adding mines to their portfolio. Moreover, they all are constantly adding more reserves to their proven list from the probable and that's why comparing them to Zisco might not be correct," said Ravindra Deshpande, metals analyst with Elara Capital.
Firdhose Coovadia, resident director - Middle East & Africa, Essar, in a telephonic interview from Harare said Zisco has good quality reserves and will give Essar an access to the sub-Saharan market which is expected to grow at a good rate. He, however, refused to comment on the total reserves of Zisco.
Rakesh Arora, analyst and associate director, Macquarie Capital Securities seconded the view. He said, "The whole world is moving towards two things, one, where there is a market, and second, where there are natural resources. This plant (Zisco) satisfies both these needs for Essar." Arora further said the steel plant will help Essar have a significance presence in Zimbabwe.
With its clear strategy of growing and expanding its core businesses in the African market, Essar officials said they would like to expand Zisco's 1-million tonne capacity in Zimbabwe and enjoy the first mover advantage with a fully-integrated steel business.
But the challenge may well be to ship out the ore from Africa for Essar's growing global steel operations. Essar in the long run would want to do that keeping in mind the quantum of reserves that will be available to them and the actual requirement in Zimbabwe.
