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Sandur Manganese


Sandur Manganese is in the business of mining manganese and iron ore for eventual use in manufacturing steel.

The company reported good growth in revenues and operating profits in the last five years – reporting 140cr of operating profits on revenues of about 350cr in the last financial year.  It employed no debt in its operations and had sizeable liquid assets of over 100cr as at 31st March 2011.  This financial position, however, may change significantly over the next few years as a result of management’s expansion plans (see below).

The company is expected to incur heavy capital expenditure in the next few years (see below), which will have an impact on future free cash flows for investors.

The business operates in an industry that has high power requirements, which causes operational problems in a power-deficit country.  The business is exposed to the risks of periodic oversupply of ore in the industry (as currently with manganese ore) where there are few outlets for demand and government regulations exacerbate this problem with bans on exports (although temporary).  It is also subject to high transportation (rail) costs for low-grade ores from its operation base.

Management plans to set up steel, ferro-alloys and coal power plants in the future with estimated investments amounting to over 2x current resources.  Hence, there is a lot of change ahead for this company and that would pose myriad operational and financial risks for investors in the company.

Minority shareholders need to carefully consider management competence in the above areas (as yet undemonstrated) and judge for themselves whether future investments will lead to commensurate payouts; conservative investors may be better off refraining from such a venture unless they have the necessary operational and management knowledge – for this judgment cannot be made primarily on the basis of past figures.
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