Mine lease renewal on expected lines, but more triggers ahead for NMDC

The miner will gain from improving global iron ore prices, rising domestic steel prices and supply disruption in Odisha

India’s largest iron ore miner, NMDC, has gained over 20 per cent from its November lows. While Wednesday’s news of the company getting a 20-year lease extension for its iron-ore mines of Bailadila in Chhattisgarh is positive, improvement in global ore prices as well as domestic steel prices are equally big triggers.

Analysts say, the extension was expected as the recent amendment in MMDR Act had already removed the regulatory overhang of mining lease renewals for NMDC's mines in Chhattisgarh and Karnataka. On the other hand, the rising global iron-ore prices will not only improve NMDC’s realisations, but also improve the scope for price hikes. The price of NMDC’s iron-ore fines has corrected from Rs 3,160 a tonne to Rs 2,360 a tonne currently. Earlier, while falling global iron ore prices had put pressure on NMDC’s realisations, rising supplies and declining steel realisations in the country too impacted the company.

Global iron-ore prices, which had slumped to sub-$80 a tonne levels in November, are now close to $93. Analysts say, this has been aided by higher Chinese crude steel production and lower iron-ore inventories at Chinese ports. With domestic fine prices currently at a 40 per cent discount to global iron ore prices and domestic steel prices in a recovery mode, there are gains ahead for NMDC.

On domestic supplies, analysts say that there could be a disruption with Odisha iron-ore mine auctions getting delayed. The Odisha miners are required to renew their mine leases, which end in March 2020. While Odisha government had invited bids, the process was abandoned after the technical bids were opened, and thereafter fresh bids have been invited for 20 mines. While the process is getting delayed, revised tender documents also mean that merchant mining costs could go up. Analysts at Antique Stock Broking say that the revised bidding process coupled with requisite regulatory approvals may lead to production from these mines resuming only after a couple of years, potentially impacting 60-80 million tonne per annum of iron ore capacity. And this augers well for the company.

NMDC, on the other hand, is also planning to raise its production post renewal of mining leases. While the business outlook is improving, a dividend yield of 4-5 per cent makes the stock attractive for investors.