NMDC: Green shoots emerging

Improvement in iron-ore realisations coupled with improving volumes to provide boost to earnings

As the demand environment for all commodities including iron-ore remained weak in the back of subdued steel demand, NMDC saw its stock dip to its multi-year low of Rs 92.65 on 6th August. The weak steel prices and demand and slump in international iron-ore prices was not a good news for the company’s profitability, nevertheless such extreme pessimism on the company was unwarranted for. The company, with largest iron-ore reserves in the country and a strong balance sheet, remains a good fundamental bet. The stock has ever since rebounded by a good 40% and trades at Rs 135 levels. Despite such a good bounce back there are further upside possibilities as the company’s prospects are brightening.

Iron-ore prices are rebounding and also the company’s volumes are rising. With this, the analysts have been revising the volume and earnings targets. The company has taken first price hike of its produce in last one year post which analysts upgraded target prices in the band of Rs 158-165.

Iron-ore price hike

The price hikes announced by the company on 11th October caused the price for lumps and fines to increase by Rs 100 a ton to Rs 4,300/ton and Rs 2,610/ton, respectively. The price hike has followed the recent rebound in international steel prices. Indian steel millers in September too had taken price hikes of Rs 1,500-2,000 a ton. With uptick in steel prices, the iron-ore prices have been boosted by excess inventories in Orissa also getting liquidated. The Orissa iron-ore miners who had been liquidating stocks in the first half, leading to subdued iron-ore prices in the country, have also undertaken some price hikes of around Rs 300-500 a ton. All these factors helped NMDC to decide on price hike.

Analysts at Anand Rathi Institutional equities before the price hikes had already observed that iron ore prices have bottomed out. As per them, the outlook has improved with currency depreciation, probable export duty reduction and global appreciation in steel/iron ore prices.

Production seen improving

On production front, the company had done slightly over 26 MT in FY13 and is likely to touch 30 MT in FY13. NMDC plans on raising its production capacity to 48 MT by FY15 to be helped by both existing and new mines, in Karnataka and Chhattisgarh (Bailadila 11/B, Kumaraswamy and Deposit 10 & 11/A).  

In the first half of FY14, NMDC has sold 13.75mt of iron ore, of which 4.42mt was from Karnataka and 9.33mt from Chhattisgarh (Bailadila mine). Karnataka mines had been ramped up to 6 million ton per annum capacities in FY13 while they are producing close to 9 MTPA now.

Giriraj Daga at Nirmal Bang observes that NMDC currently has 25mt of iron ore reserves at Donimalai mine and the company believes it can add 80mt-90mt reserves through organic exploration, the revised mining plan for which has already been submitted to the Indian Bureau of Mines (IBM) for its approval. Post approval, NMDC would have 5mt production limit for the Donimalai mine and it expects around 5mt production from the Kumaraswamy, which will mean 10 MTPA productions from Karnataka. For FY14, the company is likely to meet its 30MT offtake targets and availably of railway rakes (wagons) will support.  

Output and earnings upgraded

In the backdrop of increasing production, analysts have upgraded their production target for FY14 and FY15. DAga at Nirmal bang has increased his FY14 and FY15 production targets by 7.2% and 6.8% to 30 and 32 MT respectively.