NMDC: Strong third quarter show despite annual volume decline of 20%

NMDC, the country’s largest iron ore mining company, performed well in the quarter ended December 2017 (Q3), led by realisations, even as volumes were soft. The sales volume at 8.58 million tonnes (mt) was down 3 per cent sequentially and 20 per cent year-on-year (y-o-y). The decline was expected, as plummeting iron ore prices in October-November had led to a rise in imports.

The ex-China price of 62-Fe grade iron ore has been volatile. From over $75 a tonne in September, it fell to $60 in October due to high inventories in China. But prices recovered, crossing $75 by December end.

However, Indian prices and NMDC’s realisations were supported by strong domestic demand and mining disruptions in Odisha. The average per tonne iron ore price stood at Rs 2,445 for NMDC, higher than Rs 2,276 in the September quarter and Rs 1,990 in the year-ago period.

The volume decline was compensated by improving realisations and NMDC’s revenues from operations were down by only 1 per cent y-o-y to Rs 24.69 billion; sequentially, they were up 2 per cent. Operating profit at Rs 14.66 billion surged 49 per cent y-o-y and 12 per cent sequentially, while net profit at Rs 8.87 billion grew 49 per cent y-o-y and 5 per cent sequentially. Since the consensus estimates for net profit were higher at Rs 9.26 billion, the stock was down about 2 per cent to Rs 135.

The company might benefit in the March quarter, given the continued iron ore supply disruption in Odisha on account of mine closures following a Supreme Court order.

Iron ore realisations are likely to remain firm, supported by strong demand due to rising steel production. International prices, too, might be supported, as the world economy was showing better traction and Europe was expected to see higher demand in the first six months of 2018, said Soumen Chatterjee, head of research at domestic brokerage Guinness Securities.

Analysts at Motilal Oswal Securities said NMDC was benefiting from the tightening of iron ore supply. Several private mining leases will expire by end of FY2019-20, while NMDC will enjoy long-term leases. Analysts said investors appeared to be undervaluing the company’s profitable steel assets.

NMDC’s production was up 6 per cent in the first nine months and the trend is expected to continue. Strong demand, rising production and an attractive dividend yield will support the stock even if iron ore prices turn volatile.