Realisation and volume concerns weigh on NMDC

With international iron ore prices on a decline, domestic prices are likely to follow suit

The impact of weak international iron ore prices is now being felt by NMDC, India's largest iron ore producer. After holding prices for four months, NMDC cut prices of iron ore lumps, which has higher iron content, by Rs 200 a tonne for November to Rs 4,400 a tonne, while maintaining October price for fines, the inferior grade of the raw material, at Rs 3,160 a tonne. Analysts expect the company is likely to cut iron ore prices for December, too. Following fears of lower prices, the stock has given way, correcting about 20 per cent in one month to Rs 138 levels.

Till October-end, while NMDC was able to hold iron ore prices, the stock also managed to stay up. However, the fall in international prices led to NMDC prices becoming uncompetitive. In fact, imports are currently 23 per cent cheaper for Indian steel mills located near the coast. JSW Steel has increased its imports in the past few months. Analysts, however, feel Tata Steel has partly filled the void created by coastal steel mills. As import price heads towards $60 per dry tonne, according to analysts at Motilal Oswal Securities (MOSL), they expect NMDC to cut per tonne prices of lumps by Rs 1,100 to Rs 3,300 and fines by Rs 760 to Rs 2,400.

Estimates such as this have led to concerns on realisations. The international supplies of iron ore have continued to remain strong while demand has not caught up substantially. Analysts believe iron ore production cut from China has not been seen so far and Chinese mines have managed to keep their costs under control as well.

While declining iron ore price is a cause of concern for companies like NMDC, there are concerns on volumes, too, on the back of weak demand. Analysts at Religare feel expected off-take may not materialise from some key customers of NMDC and also there may be some delays in capacity expansions.

Analysts are cutting their price and realisation estimates and hence target price for NMDC. While analysts at Religare arrive at a DCF-based one-year target price of Rs 155, analysts at MOSL have target price of Rs 161 for the stock. For long-term investors though, the dip in share price offers a good opportunity to accumulate as NMDC is a very cash-rich company with vast iron ore reserves, good dividend history and importantly is integrating forward by setting up a steel plant which is to be completed in FY17.