After years of underperformance, NMDC stock strikes when iron is hot

Rally fuelled by global rise in iron prices; stock trading at P/E multiple of 13x

After years of underperformance, iron ore miner NMDC’s (formerly National Mineral Development Corporation) stock price is up 55 per cent since the beginning of October 2019, against a 24 per cent rally in the Sensex during the period. After its recent rally, the stock is back to its year-ago levels, even as the Sensex is up 16 per cent in the last 12 months.

This will, however, be music to the ears of long-term investors who have lost heavily in the past decade. But the iron ore miner is still down nearly 70 per cent from its all-time highs in early 2010. Clearly, the stock has a lot of ground to cover.

The recent rally in NMDC has been fuelled by global rise in iron prices. There has been steady rise in international iron ore prices in the post-pandemic period. China’s iron ore has almost doubled in price since May last year. The benchmark grade ore is now trading at an all-time high of $168 per tonne in the spot market, up from $83 per tonne at the end of May this year.

Analysts expect the rally in iron ore to sustain for some more time, given a better-than-expected economic growth in China and lower-than-expected shipments from Brazil’s Vale — the world’s second-largest iron ore producer. This has skewed the demand-supply balance at a time when global steel production is surging.

This will translate into higher revenue and profit for NMDC. Given the high fixed costs of ore production, ore prices have a much bigger influence on NMDC’s margins and profit than changes to the production and shipment volumes.

Early this week, NMDC hiked the price of lump ore (with 65.5 per cent metal content) to Rs 5,700 per tonne. This more than twice its indicative price of Rs 2,800 per tonne at the beginning of January this year. The price hike will translate into a sharp rise in the company’s operating margins and profit in the fourth quarter of 2020-21 and beyond.

Analysts also expect the company to gain from a ramp-up in production volume after the company gained new mines from the latest auction.

This makes it a good investment candidate for investors, given the stock is trading at an attractive price-to-earnings multiple of 13x and a juicy dividend yield of 4 per cent.

The risk is the unrelenting slowdown in corporate capital expenditure in India that restricts the demand growth for steel that weighs on iron ore prices in the domestic market. There is strong possibility of a decline in global iron ore price once mines in Brazil and Australia ramp up production in the next few months and pent-up demand for steel globally comes down.