ADVERTISEMENT

How NMDC Managed To Outperform Peers

Shares of the state-run miner have risen nearly 28 percent year-to-date.

Iron ore mining has resumed in Bacheli and Kirandul blocks, VS Prabhakar, chief operating officer of NCL—a joint venture of NMDC and Chhattisgarh Mineral Development Corporation. (Source: NMDC website)
Iron ore mining has resumed in Bacheli and Kirandul blocks, VS Prabhakar, chief operating officer of NCL—a joint venture of NMDC and Chhattisgarh Mineral Development Corporation. (Source: NMDC website)

NMDC Ltd. outperformed nearly all mining peers even as the Nifty Metal Index was dragged down by the U.S.-China trade war, weak global demand, falling metal prices and the ongoing economic slowdown in India.

Shares of the state-run miner rose nearly 28 percent year-to-date, beating mining peers. The Nifty Metal Index tumbled 14.8 percent during the period.

Here are the factors that supported NMDC’s gains:

Higher Prices

Iron ore prices have had a volatile year. They surged in the first half, triggered by supply disruptions after Brazil’s Vale SA suspended operations at its Brucutu mining complex. The world’s largest miner of the bellwether commodity had decommissioned all its upstream units after a fatal dam disaster, impacting 30 million tonnes of output. But the prices plunged in August as output recovered and global growth slowed.

Vale lowered its production outlook for the first quarter of 2020 to 68-73 million tonnes from 70-75 MT as it plans to slash output from its Burcutu mine in Brazil. As a result, Dalian Commodity Exchange iron ore prices, a benchmark for the steelmaking raw material, jumped 7-8 percent in the last one month on supply concerns. Iron ore has rebounded nearly 18 percent from its lowest level in August.

According to a report in Steelmint, Odisha-based miners have increase iron ore prices by 5-10 percent. That provides NMDC room to increase its prices as well.

Edelweiss Securities in November said a price hike by NMDC is imminent due to a spike in raw material prices in the form of sponge and pellets and also due to hike in prices by steelmakers.

Domestic triggers such as revision of norms for the upcoming iron ore auctions, amendment of the Mines and Minerals (Development and Regulation) Act and allocation of coal block by the government also favour NMDC.

Environment Hurdles For Others

The Ministry of Environment, Forest and Climate Change on Nov. 29 mandated fresh environment clearance for the mines whose leases are expiring by March 2020. All potential winning bidders will have to seek environment clearances before starting production at 18 merchant mines in Odisha—contributing around 50 percent of India’s iron ore production—to be auctioned in February.

That came as a surprise as potential bidders expected that the existing environmental clearances for the mines would continue for two-three years on a provisional basis till the new lessee received the permission, said the note from Emkay Global. Any delay is expected to disrupt iron ore supply, increasing prices. NMDC stands to gain from any such disruption.

Renewal of Leases

Karnataka’s move to not extend the lease for NMDC’s Donimalai mines stoked fears that even Chhattisgarh—where the company has five mines with installed capacity of 29 million tonnes—could hold up renewals. But the recent amendment in MMDR Act removes the regulatory overhang.

Prior to the amendment, the relevant provisions pertaining to lease renewals read as “upon receipt of an application the state government may extend the mining lease by 20 years”. However, this has been replaced with “upon receipt of an application, the state government shall extend the mining lease by 20 years”. That makes it mandatory for the two states to renew all expiring mining lease agreements for another 20 years.

The Chhattisgarh government has renewed Baladila, Bastar mines leases for another 20 years.

Also, NMDC’s revised plan for Kumaraswamy mine was approved on Wednesday, enhancing the mine’s production capacity from 7 MT to 10 MT for FY21 and FY22.

Coal Block Allocation

India’s Ministry of Coal has allocated the Rohne coal mine for NMDC’s under-construction Nagarnar steel plant in Chhattisgarh. The mine will not just serve the company’s captive coking coal requirement but may also be used for commercial purposes as the ministry has allowed the sale of coal from the block.

These reserves could feed NMDC’s steel unit for 30 years, Jayanta Roy, assistant vice-president at ICRA Ratings, said. It is expected to be a huge positive for the company since coal is the largest cost for a blast furnace operator, Roy said.

Edelweiss Securities said it expects Rs 400-500 crore Ebitda per annum from Rohne mine.

Outlook

JP Morgan, which gave a neutral rating to NMDC in its Nov. 11 report, expects both volumes and higher prices for NMDC for the coming year. The brokerage expects a huge upside for the counter from a potential disruption in Odisha even as a continued weak steel production will be a major downside.

According to Emkay Global, NMDC is well-positioned to supply iron ore during the impending crisis. It expects an earnings upgrade for the stock once Donimalai mines commence operations before FY21 as the brokerage hasn’t assumed any production from the mine in FY20 to FY22 estimates.

More than 60 percent—12 of the 20—analysts covering the stock have a ‘Buy’ rating for NMDC, according to Bloomberg data. The average of 12-month targets suggests a potential upside of 8 percent.

Watch | NMDC Finds Itself In An Exclusive Club This Year

Opinion
How To Sign Up For BloombergQuint Story Notifications