Dysfunctional Donimalai mine to weigh on NMDC's near-term prospects

Cheap valuation, high dividend yield only comforting factors for stock

Shares of India’s largest iron ore mining company NMDC have corrected 12 per cent since their highs earlier this month. While September quarter (Q2) volumes were impacted by the monsoon, the firm’s key Donimalai mine is yet to restart operations. 

The quarter, therefore, saw sales volumes fall 33 per cent sequentially and 13 per cent year-on-year (YoY) to 5.8 million tonnes (mt). Falling realisations also did not bode well. 

Led by price cuts, domestic realisations fell short of estimates by Rs 25 a tonne at Rs 2,891, according to analysts’ calculations. Consequently, operating profit declined 15.7 per cent YoY in Q2. The trend is unlikely to change any time soon.

Per-tonne global iron ore prices, which had risen to the $120-level in July on the back of supply constraints, have softened since and are at the $80-level. This decline in prices is putting pressure on NMDC’s domestic pricing. 

Since August, it has taken cumulative price cuts of Rs 400 a tonne, the impact of which will be felt more in the coming quarters, say analysts. There are also concerns that the country may see higher supplies from producers based in Chhattisgarh, before their mining leases end in March. 

Analysts at Motilal Oswal Financial Services (MOFL) say they expect prices to decline in the March quarter on account of an oversupplied market, higher availability prior to expiry of mine lease, and some tapering off in global prices.

Lower global prices mean exports could be affected. The company had exported slightly more than half a million ­tonnes (10 per cent of overall output) during Q2. 

The positive is that part of the softness in realisations will be mitigated by a rise in volumes, as the monsoon season has ended. 

Analysts expect the Donimalai mine to eventually get clearances for re-start, a move that could boost volumes by up to 0.6 mt per month. However, higher volumes may not be enough to fully offset the impact of lower prices.

The steel plant is also nearing completion and will be valuable, given its access to low-cost iron ore (from the company’s mines), and economies of scale. 

Analysts at Antique Stock Broking believe the commissioning of the steel plant will lead to higher return ratios, and therefore, higher valuation of the asset. That, however, is some time away. Steel prices, too, are currently depressed.

For now, a high dividend yield of about 5 per cent and cheap valuations (7x its FY21 estimated earnings) are the only comforting factors and are keeping analysts positive on the stock.