Better realisations keep NMDC's prospects bright, volume challenges remain

The stock of NMDC (previously known as National Mineral Development Corporation) is up 15 per cent since its lows last month. Rising international prices, coupled with robust domestic demand for iron ore, is positive for the overall price trend.

A better-than-expected March quarter performance last week, too, augmented investor sentiment. While disruption in Karnataka hurt, overall volumes were driven by Chhattisgarh mines, which, coupled with lower costs, helped its March quarter performance. Volumes were down just 3.5 per cent year-on-year, but up 17 per cent on a sequential basis.

The company had taken two price cuts during the March quarter and another one beginning April (by about Rs 150 a tonne). This was reversed thereafter, with price hikes of about Rs 250 per tonne. The international iron ore price is now above $95 per tonne levels, compared to around $85 per tonne in the month of March ($55 levels in December). 

With rising international iron ore prices, prospects for domestic players have also improved. Even after the 9 per cent hikes in the current quarter, analysts at Kotak Institutional Equities say that if import parity is considered, there is potential of further 10-15 per cent price hike. Clearly, the realisations outlook has improved.

Higher volumes from Chhattisgarh mines also bode well. The demand of iron ore in the country remains strong due to higher steel demand. Brokerages which expect iron ore mining to resume in Karnataka are positive for NMDC. 

Analysts at Motilal Oswal Securities say the operations at Donimalai mine remain suspended, but expect NMDC to eventually get its mining leases renewed without sharing any revenue. There is no risk to the renewal of Chhattisgarh mining lease, according to the company. Hence, analysts see significant gains for the stock. 

Analysts at Antique Stock Broking, too, have revised price targets as commissioning of the steel plant, targeted in second half of 2019-20, would improve return ratios and lead to a higher valuation of the asset.

However, investors need to be watchful in the interim. The mining leases of Odisha miners expire in March 2020 and there could be volume surge prior to this in the domestic market. This might have a negative impact on domestic prices, despite strong international prices. 

Though expectations are high on Donimalai mining resumption, till the same happens, the company may not see volume growth. Volume challenges and Odisha-related risks can lead to volatility in stock prices in the near term.