NMDC shares down 6% after FPO band announcement

The share price of NMDC, the state-owned mining company, fell over 6 per cent today after the government announced a price band of Rs 300-350 per share for its follow-on public offer (FPO).

Markets players said the fall was obvious as there was hardly any liquidity in NMDC shares, in which the government holds 98.38 per cent. They said the market price of the stock was at a premium to its international peers such as BHP Billiton and Rio Tinto.

The government plans to sell 8.38 per cent, or 332.24 million, shares to the public to raise up to Rs 11,628.5 crore at the upper end of the price band. The stock price fell 6.2 per cent to Rs 375.65 on the Bombay Stock Exchange (BSE) today. The Sensex was down 0.3 per cent. NMDC’s stock has fallen 25 per cent since the beginning of February. The BSE Sensex has risen 4 per cent during the period.

“When the price range is Rs 300-350, the direction of the stock has to be on the lower side,” said Ajay Parmar, head of research at Emkay Global Financial Services. He said there was expectation that the FPO would be priced at the lower end of the price band.

Foreign Broking firm CLSA, in a note on the FPO, said peer multiple benchmarks would suggest a value of Rs 172-219 per share, “while based on our assumption of $55 per tonne of long-term price (in real terms) for iron ore, we get a net present value (NPV) of Rs 152 per share. Using 50 per cent premium to peer multiples and higher iron ore prices (for NPV), we get a value of Rs 237-328 per share”.

It added that given NMDC’s superior ore and low production costs, it would rank high on a per-tonne Ebitda (operating profit) basis than its global peers.

CLSA thinks the upside potential to existing reserves/production may result in NMDC trading at a meaningful premium to its NPV. “Upside could also arise from sustained strength in iron ore prices and quick progress on NMDC's proposed steel projects,” it said.