NMDC sees increasing comfort on volumes, pricing

With volumes improving and realisations having stabilised, the iron ore miner with a strong balance sheet remains a good investment

Production and sales numbers posted by NMDC till August 2016 have restored the street’s confidence in the iron ore miner, which is also reflecting in its share price scaling to 52-week highs of Rs 115.30 on Wednesday. The NMDC stock closed 7.06 per cent up at Rs 114.55. The company on Wednesday announced that its iron ore sales volume stood at 12.93 million tonne (MT) during April-August 2016, marking a growth of 14.7 per cent over first five months in FY16. Even production at 11.69 MT was up 11.12 per cent over the corresponding year ago period, indicating that volume growth remains healthy.

While volumes have been good, NMDC has also been posting better realisations. It had reported better than expected numbers for June’16 quarter on the back of higher realisation, which analysts say is led by good pricing in exports. Iron ore realisations thus came at about Rs 2,191 per tonne, recovering sharply on a sequential basis from levels of Rs 1,744 per tonne seen in March’16 quarter. The exports incentive for the company’s low grade ore is having a positive impact, feel analysts. Export duty on iron ore fines with Fe content below 58 per cent had been reduced from 10 per cent to nil while export duty on iron ore lumps with Fe content below 58 per cent was brought down to nil from 30 per cent in the Union Budget.

Interestingly, the price in the domestic arena too is stabilising. NMDC had taken price hikes in March-April period for its produce as international prices of iron ore rebounded to about $70 a tonne in April’16 from sub $40 levels earlier. However, the prices remained volatile thereafter and NMDC had cut prices in subsequent months as iron ore prices (62% Fe grade, ex-China) fell from highs of $70.46 per tonne (dry metric tonne) in April 2016 to $48.13 per tonne in June. Nevertheless, it has rebounded thereafter to $60 plus levels now. This has helped NMDC maintain iron ore prices in the month of August providing comfort to the street.

Pallav Agarwal at Antique Stock Broking says that domestic iron ore prices are expected to have bottomed out considering the improved domestic steel outlook post imposition of anti-dumping duties and MIP (minimum import price) extension. NMDC's fine prices are already at a significant discount of 50 per cent to international ore prices, reducing the possibility of further price reductions, he adds. In fact, after the price hikes by MOIL for manganese ore on expectation of better steel demand, the chances of price hikes by NMDC have also increased. The price hikes taken by domestic steel players also bode well for iron ore prices and so does the optimism on improved steel demand in second half of FY17.

In this backdrop of limited downside for iron ore realisations and improving volumes, the NMDC stock has outperformed the S&P BSE Sensex. Analysts say that with improving business outlook and strong balance sheet, the NMDC stock should do well going ahead and remains a safe bet for long-term investors.