NMDC-Value and Growth opportunity


(shyam) #1

Current mktcap=36701 cr
Cash balance=5904 cr
Debt=1214 cr
NP=3857 cr
One can buy the entire business at CMP and get an immediate 12% yield
NP/(MKT CAP+DEBT-CASH BALANCE)=12.05%
Current dividend yield=4.5% which is very likely to be sustained or even raised.

In addition, there seem to be many growth factors over the next 5 years:

  1. SC has this year forced closure of 7 mines in Odisha for failure to pay penalties. This has already raised iron ore prices. This will probably be made up by other mines or the mines will get back into operation later in FY19 after payment of penalties so this is a short term advantage

  2. In the medium term, lots of private mining leases across the country are ending in Mar20, and will be auctioned. This will cause large scale disruption to production and there is a potential hit to production of 60 MTPA which is huge. NMDC mines are not affected. This should cause elevated iron ore prices for a while until new owners stabilise ops.

  3. The long awaited 1.2 MT pellet plant has started up and this should add to profits as this uses byproducts as feedstock (iron ore tailings) which have till now not been used and are available in abundance.I have seen an estimate of 450 cr annual addition to profits out of this.

4)The long delayed 18K cr 3MTPA Chattisgarh steel plant should start production in Dec18. This should be a profitable, maybe even highly profitable plant, built with the latest tech, high economies of scale, reportedly with one of the biggest blast furnaces in India, captive iron ore mine and easy access to mines & ports (HDFC report)
Potential revenues and profits from this and the pellet plant dont seem to be reflected in the current valuations. My estimate is that even assuming initial operation at a conservative 40% capacity it should add 3000-4000 cr to annual revenues.

  1. Indian steel players are ramping up capacities which should create its own demand. Essar steel situation should get resolved soon and the new owners first priority will be to ramp up efficiencies and production, as Tata is trying to do on a war footing with Bhushan steel. Essar is a major customer. So is RINL which recently completed a huge expansion in steel capacity from 3 MTPA to 7 MTPA.

  2. NMDC is also trying to offload 49% in the steel plant to a partner, if this happens, it will add to cash balance. Their expectation is to net 14k cr for it.

  3. NMDC is actively scouting partners for SPVs to set up additional steel plants in Jharkand and Karnataka

  4. Various projects are in progress to take the iron ore production capacity from 34 MTPA (utilised a 100% this last FY) to 67 MTPA in 3 years.

Negatives that I see-

  1. Depreciation for the pellet and steel plant will reduce profits somewhat, of course more than balanced out by the additional revenues.

  2. Expansion across many players in steel production might depress steel prices and reduce iron ore demand in the longer term

  3. Some global disruption that may depress iron ore international prices.

  4. Some steel players now have captive mines of their own and this might reduce NMDC sales
    I think its to counter this that NMDC is now going upstream into steel production.

  5. Private players with mining leases will actively maximise iron ore production & hence their profits as their lease term nears expiry in 2020 leading to a temporary surplus in the market

So considering all the above it, on balance, seems a good long term investment with a decent guaranteed div yield while the above scenario fructifies.
I would welcome feedback from members who have contrary opinions or who could point out any factors I have missed.

Some of the ref material as below

Steel plant divestment

mining lease expiry

NMDC- Pick of the Week -050218.pdf (404.3 KB)

NMDC-08012018.pdf (321.2 KB)

Disclosure: I havent invested yet but am planning to.


(GSrikan) #2

I have been tracking nmdc since last few months after noted investor Mr Shyam shekhar recommend subscribing to the FPO. Actually I thought of subscribing to this blindly on his advice, since I know of his research on global steel demand and indian steel scenario. Somehow, I missed subscribing to FPO but bought @145 rs. Later, I invested more at 130 rs, thinking goa ban is big positive for NMDC. I started digging a bit later and found few points.

  1. the steel plant started in 2008. It took ages for NMDC to bring it to final stages. One reason for delay is for 2 and half years there was interim CMD as PM led selection panel delayed the selection for that much due to various reasons. Once current CMD Mr Baijendra Kumar is elected, I believe, the steel plant work got expedited. He seems to be a honest and competent fellow.
  2. I came to know about only later that Goa iron ore is low grade ore which below 58Fe. NMDC’s ore is 65 or64Fe which is very high quality ore. Odisha too is high grade ore.
  3. china’s pollution control measures are encouraging steel producers to use more high grade ore which is causing high grade and low grade ore price difference to widen.
  4. NMDC’s current iron ore capacity is 48mtpa. For steel plant they are planning to start production from separate mine. News reports say for 3mpta steel, they will produce 5mtpa ore.
  5. they have been very reserved so far in bidding for new mines according to current CMD. He said they will be little more aggressive in future.
  6. Govt is encouraging steel companies to have captive iron ore mines, which is a major drag for NMDC.
  7. for some reason Australia (the biggest iron ore producer) expects iron ore prices to not sustain at current level and prepared budget considering MuCH lower price.
  8. I don’t know how much of “aluminum replacing steel in many applications ex auto components” would affect the future global steel price thus ore price.
  9. NMDC is pretty good in taking care of environment by reforesting mined areas.
  10. NMDC has diamond mines in madhya Pradesh. I guess it’s not very profitable. They are facing environmental hurdles for expanding them.
  11. china’s migration towards Electric arc furnace would significantly reduce usage of iron ore and thus causing reduction in demand. They are focusing on reusing domestic steel scrap. This loss of demand has to be compensated by India and US, both of which are stressing a lot on infra development.

Disclosure: invested & biased. I believe this is certainly undervalued. But don’t believe it has any mutibagger or compounder capabilities. My investment thesis is it has pretty limited downside from here and waiting for start of steel plant and steel plant to be reflected in valuations.


(GSrikan) #3

Couple of more observations:

  1. Q4FY18 is the only full quarter where the recent hefty price hikes are reflected in the results. Q3FY18 had 1and half month production disruption due to some major issue(rail link issue I believe).
  2. Naxal threat is always there in chattisgarh where major nmdc mines are.
  3. the current year they paid too much tax, which is tax from previous years (deferred tax?).
  4. if current prices and sales of FY18 can be sustained, the profit could be easily more than 4500 cr + pellet plant profit (which is still facing stabilization issues).
  5. NMDC board wanted to not give final dividend this year as steel plant would require lot of working capital etc. Later it seems govt forced it to give out the dividend.
  6. govt believes nmdc does not have capabilities to run steel plant, so decided to fully or partially divest to bring in private player. The locals are seriously opposing it. Govt may not go ahead with divestment until central elections are over.

(shyam) #4

Thank you Srikan for your very detailed and informative response.
I learnt quite a few things esp points 7 & 11 .

It seems to be its a situation with a limited possibility of a downside due to

  1. Already low valuations with possibility of lower prices offset by the dividend yield
  2. Any lower iron ore realisations would be offset by volume growth

The upside seems assured as the pellet plant and steel plant, one of which is operational and the other which will be operational by year end, dont reflect in current valuations.
These 2 plants and esp the steel plant would add 30% to revenues and profits by my estimate.

I agree its not a multibagger or a very long term compounder but it seems to be an assured minimum 10% CAGR over the next 3-5 years at current prices on top of which is the 4.5% dividend yield, which makes for a decent overall return.


(GSrikan) #5

http://www.newindianexpress.com/nation/2018/jun/27/nmdc-gears-up-to-turn-steel-manufacturer-by-year-end-1834096.amp?__twitter_impression=true

Let us see if the steel plant truly gets commissioned by end of this year.

On ongoing fight with Karnataka steel players, it seems, nmdc is unfairly charging premium over odisha and chattisgarh prices due to shortage in Karnataka. Hope, the bureaucrats running nmdc know what they are doing.


(GSrikan) #6
  1. Dont know who is that big customer he is talking about who was de-stocking and now resumed buying again. JSW steel was their biggest customer, who was telling that they are buying from Odissa as NMDC is charging too much. Even after incurring high transport costs they say they are saving money. Got to take this claim with pinch of salt as they might be saying it to pressurize NMDC into reducing prices.
  2. It seems NMDC has reduced prices in Karnataka, if what I heard is right in the video.
  3. No question regarding whether the pellet plant’s troubles are sorted out or not.
  4. The 38MT guidance is intact. If it works out then well and good.

(shyam) #7

The more the NMDC share dips, the better the investment proposition looks to me, especially with the steel plant coming up max early next year (addnl 7-9k revenues) and the co sticking to its sales target in view of continuing good dynamics in the steel sector.
Disclosure: 14% of pf and adding more on dips.


(GSrikan) #8

The only scary part for me is govt policy of encouraging captive mines for steel manufacturers while restricting the pure miners from exporting (not sure the export duty is the only deterrent or nmdc needs to take govt permission too. Nmdc went to court for permissions for exporting when local steel players refused to buy few weeks back. Govt renewed permission to export ore to Korea, Japan etc. Not clear how this export stuff works out). We need to get some statistics regarding how much domestic requirement (106 mtpa steel produced; I guess it requires about 175 mtpa ore of 62fe, my guess, could be wrong), how much is domestic ore production, how much is being imported, how much is exported etc details. We should try to gather as much info as possible before averaging.
Disc: invested avg price 141 rs.


(GSrikan) #9

Another risk is, nmdc is facing issues with pellet plant since more than 6months. Not sure whether they have sorted out those issues or not.

Steel must be lot more complex than pellet plant.
Hope they don’t face issues with steel plant.


(SBT) #10

They have once again hiked price but production is below expectation.


(GSrikan) #11

Karnataka issue seems to be on track to be resolved with some price cut and discussions happening.

Steel plant commissioning too seems to be on track by year end.

Only risk is recession before earnings peak (my guesstimate being 7-8k cr by end of FY20)

Disc: invested


(GSrikan) #12


Seems to be a good sign as nmdc beat adani and vedanta to win the license. Hope they repeat this success with future mine auctions too.

More details required to find out how profitable it is.

The MD seems to be a honest and capable leader.

Disq: invested


(SBT) #13

I think it cannot be a 2.2 million Te gold reserve as reported in the news. In Hindu business line they have reported 1.8 mt of ore reserve. Every tonne will yield 5.5 g gold. Therefore, it is a gold reserve of 1.8 X 5.5 million gram = 9.9 million gram = 9900 kg (approx 10,000 kg).
At Rs.30 lakh /kg , it translates to Rs3000 crore.
NMDC will share 38.25% of its revenue (as per news) with state govt. This leaves 61.75% of Rs.3000 cr = 1850 cr.
Now we need to work out the expenditure for mining this gold. Rest will be the profit over the period of the life of the mine.
In best case the company could explore more and may find even more reserves in the surrounding areas.


(GSrikan) #14

Your estimate looks accurate from Hindu article point of view, though we need to see the full details when released officially. It’s not the profitability from the current win which is significant. It is it’s ability (though I am not sure whether it has done it in the past or not) to beat private companies like vedanta and adani is significant. I heard from current MD’s interview that they were not able to win iron ore mines in auctions in past because they were too conservative. He said in future they will be bit more aggressive and win the mines in auctions. Hope, this win is sign of things to come in future.


(Manohar T. Patil) #15

Disc-Invested at higher level. Adding at current level


(Manohar T. Patil) #16


(Ayush Mittal) #17

(kush_gangar) #18

NMDC Report on Recent Price Hike and AR 2018 highlights.pdf (215.4 KB)


(GSrikan) #19

Somewhere in news, I read the first steel product will be out by Mar 2019. If we add another 3-6 months delay (due to stability issues) the production should start in an year from now and another year for full capacity utilization. Hope the steel theme plays out as expected for next couple of years despite global trade war risks.

Discl: invested @140 rs