Lower prices of iron-ore factored into valuations of NMDC's stock

Iron-ore supplier NMDC reported an operating profit of Rs 1,990 crore, up 5 per cent year-on-year (Y-o-Y) with realisations of Rs 1,800/ tonne. Operating profit decreased by 7.8 per cent on a sequential basis. 

Revenue grew 13 per cent Y-o-Y to Rs 5,390 crore in the first half of this financial year (Q1FY24), but decreased by 7.8 per cent quarter-on-quarter (Q-o-Q).

Blended average sale price stood at Rs 4,915 per tonne, down 20 per cent Y-o-Y, given the high base of Q1FY23 when global fears of supply disruption drove up prices. 

The adjusted net profit was up 13 per cent YoY while on a sequential basis it was up 59 per cent to Rs 1,660 crore due to lower tax rate.

The company registered its highest-ever volumes of a Q1 with a production of 10.7 million tonnes (up 20 per cent Y-o-Y) and also sold 11 million tonnes or MT (up 41 per cent Y-o-Y). Volumes compensated for lower realisations. 

Prices (including royalty and contributions to District Mineral Foundation and Nation Mineral Exploration Trust) for fines improved 7 per cent Q-o-Q (down 18 per cent Y-o-Y) to Rs 4,511 per tonne, while prices for lumps saw a reduction of Rs 125/tonne to Rs 5,521/tonne.

Royalty as percentage of sales stood at 43 per cent in Q1FY24 versus 44.8 per cent in Q4FY23.

The guidance is that volumes for FY24 are expected to hit 47 MT- 49 MT but pricing pressure will continue in the near term due to weak global outlook. Currently domestic realisations are higher so it is not focussed upon exports.

Capex guidance for FY24 stands at Rs 2,000 crore and higher capex is expected from FY25 as NMDC aims to enhance capacity to 100 MTPA.

The major capex projects include a slurry pipeline (Rs 1,100 crore), pellet plant (Rs 1,200 crore) and a beneficiation plant (Rs 1,100 crore).

Commissioning of beneficiation plant and slurry pipeline is expected by FY25 end. NMDC will consider capex towards Kirandul mines.

The spun off listed subsidiary NMDC Steel recently commissioned its blast furnace with full plant commissioning expected by the end of August.

NMDC expects to supply 4.5MT-5MT of ore to NMDC Steel at full capacity. For FY24, NMDC Steel will have a capacity of about 1MT.  

Management is awaiting the transfer of land for Tokisud and Rohne coal blocks. In case of Tokisud, the company has already appointed a mine development and operator for coal production and mining is expected to commence by end-FY24. In Rohne, NMDC is awaiting notifications and expects activities to commence only from FY25.

The company is seeking to commence gold mining in Australia after receipt of mining clearances. It has a joint venture with Legacy Iron Ore of Australia (NMDC owns 76 per cent of listed Legacy Iron Ore). 

NMDC has also tied up with Hancock for magnetite iron ore and lithium exploration in Australia but the gestation period for a mine would be around 5 years if exploration is successful.

NMDC has a strong balance sheet, with excellent net debt to equity ratios and free cash exceeds total liabilities. Low prices for iron ore are a cause of concern since earnings could fall until such time as the cycle changes. But it has a low valuation which price in the cyclical challenges.