Hi Nirav,
I was not aware of this data, thanks for making me aware.
Other way of thinking about this could be - eventually, iron ore is a commodity and the mines being acquired by JSW etc are mines which were already operational so overall the demand/supply broadly remains the same…just the buyers and sellers should change?
Ofcourse, as these were material buyers, there could be issues for sometime?
Nirav,
So you are right…Two Big customers will move out and NMDC will have to start selling to smaller steel players.
Currently small players bought from Merchant Miners (whose mines have now gone to JSW, Essar). So logically these small players may have to buy from
a. NMDC or
b. Merchant Miners who have got mines in current auction
Now Merchant Miners who have got mines in current auction have bid high premiums and will have higher cost of output.
NMDC comparatively can sell at better price
Disclosure : Invested
Divestment of the steel plant you are talking about is that of Neelachal Ispat Nigam Ltd (NINL) and not NMDC. Right??
The Nagarnar steel plant won’t be divested.
NMDC is at an interesting stock to track, imho.
Currently, multiple events are happening nationally and globally such as Iron Ore prices falling due to lockdown, Orissa auctions going majorly to captive hands + govt promise that transfer will be smooth, uncertainty over Donimalai mines, possibility of Nagarnar steel plant commissioning happening in FY21 and the industry requesting the government to remove the 30% export duty on higher grade ores. Internationally, Brazil saw output fall last year due to safety issues. Both Australia and Brazil’s current output might be impacted due to lockdown. Further, data from China that ore and steel inventories have been falling suggests that Chinese demand could be coming back.
Of course, things are very fragile now and we might get a clearer picture when things open up.
While technically NMDC is a fantastic business to own given its excellent free cash flow, margins, scale, access to mines, etc - we need to keep in mind that (1) It is a PSU, hence, we need to appropriately discount. For instance, the 3MT Steel plant has costed 50% more and taken extra 4-5 years to build. It should’ve been live long back. (2) I think in 2016, the revenue fell 50% despite volumes being in the same range due to iron ore production rising globally against slow demand growth. Iron ore at the end of the day is a commodity and can fluctuate either way. I would enter such a stock only when we have excellent margin of safety. If 5 things factors favour NMDC, 1 unfavorable factor can impact demand supply more potentially and we need to factor those negative scenarios when buying.
The ideal buy scenario for me would be when stock price falls further 30-40% from here due to general market pessimism and also specifically due to lack of clarity around the above factors. And I would sell after:
Yeah, my mistake in earlier post
Problem with this company is lack of clarity with either management or GOI w.r.t. to its ever ongoing investment in steel plant. Cost over-run and delay is secondary but someday govt say we want to divest and management have no expertise in steel making.
There pellet plant is also not contributing in there top line despite being commissioned about 3 years back.
There sales volume are same from last 5-6 years, NMDC prices are excluding royalty,dmf etc which are always below the landed cost of iron ore in Indian ports. Recently there few customers had participate in mine auction and acquired iron ore mines.
Further govt of India doesn’t want iron ore to be exported since it is key raw material for steel makers and hence there is export duty. So Exports are any way low margin for this company with high export duty of 30%.
GOI, Karnataka state govt and NMDC still not able to reach to any mutual agreement with respect of Donimalali mine. Any way they have a capacity of 7 Million tonne each in Karnataka with there 2 mines and co despite being not extracting anything from donimalai is not able to sale its remaining 7 Million tonn in Karnataka itself means there customers are shifting from there.
Yesterday I was reading now that Chattisgarh gov is not happy with NMDC since its made contributed to PM care fund rather than paying to state govt in respect of litigated duty.
There is further delay in Nagarnar steel plant. Now company have a new CMD Mr Sumit Deb (internally promoted) from IAS N. Baijendra Kumar.
Sales volume year to date (till July20) are down 20%.
No update on Karnataka mine, pellet plant is not contributing much to it. A huge wealth destroyer in last 10 years despite being in high margin, debt free capex of 20k crore. PSU tag and inefficient management are the biggest reason.
I was going through the SBI MF market outlook for June 2020.
Iron Ore is one of the few commodities where the price has increased.
Also, the chart of Iron Ore prices in tradingeconomics shows the Iron Ore price recovered quickly after 2008 economic crisis
As I understand, the commodities follow cycles. Can the increase in Iron Ore prices offset the current degrowth in sales for NMDC?
What can be the triggers for rerating of NMDC?Still wonder how come this company being debt free, almost monopoly destroying its value over time.
Disclosure - This is the only PSU I am invested in.
Exports are restricted for NMDC. It is only supplying to South Korea and Japan under long term agreements. Further there is export duty of 30%, hence lesser margin in exports. Exports are discouraged by GOI (NMDC iron ore is higher quality) and there objective is to make it available at lower cost to steel industry to keep it competitive.
NMDC also do not have pricing power in India always check landed cost of iron ore in India. It also falls under ministry of steel is negative for the company.
Thanks for your reply.
I understand NMDC strictly has to operate under GOI’s regulatory framework.
I had a call with someone who works in Essar steel(Taken over by Arcelor Mittal) and I was shocked to hear that their plant is operating at 100%. They get their ore from NMDC.
Due to recent liquidity infusion from central banks in Europe, they got huge sum of money at lesser rate and so they must be pursuing aggressive sales. I assume, they must be exporting it to China.
Can the cost of iron ore price increase in the medium term due to pent up demand? One the other hand, if NMDC makes more profits, GOI also gets more money as dividends.
prime candidate for disinvestment
Don’t think disinvestment is possible as the company owns natural resources. At best they may sell the steel plant, which if done would be a huge value unlock
Few of my notes on NMDC , based on my understanding so far about the company:
– NMDC commands leadership in Iron ore mining in India. It has been extracting 30 MT of high quality Iron Ore (above 64 grade) on annual basis since last five years. The company has been generating positive free cash flows and generously paying dividends in the past.
– Out of total production of 210 MT Iron ore production in india, NMDC commands 15-18% market share.
Positives
Despite being cyclical industry, NMDC is most competitive/ cost efficient player in Iron Ore mining. Point to note - Even when iron ore prices fell to half in FY 2015-16, its operating margins reduced from 70% to 40%, indicating the company has capacity to remain meaningfully profitable, despite drastic decrease in Iron Ore prices.
Minimal Capex Requirement for growth, if it comes (assuming the company will not make plans outside mining, e.g. creating another steel plant)
Huge Optionality -
Importing Iron ore is not competitive, neither is the iron ore from Private Merchant Miners competive wrt quality and price, hence for steel producers, NMDC is the best choice.
Currently trading at reasonable valuation, 5-8 times operating cash flow.
Cash Rich, no debt, Approx 50% of the profits are distributed as dividend
Minimal Receivable , despite being government enterprise
Employee expense low wrt total expenses , an important factor while evaluating Government enterprise
Baring the price of iron ore aside, Long term demand of company’s product (Iron Ore), will be intact, that is, no disruption expected.
Negatives
Part of a Cyclical Industry
With Promoter being Govt of India and looking at what was stated and what is achieved in last 5 years, its safe to assume things will remain the same as they are now. That is, Investor should not expect any growth of positive surprises from the company.
More divestment on the go, currently promoters own 70% and will bring the stake down to 50% in some time, further depressing share price.
Customer concentration, 50% supply to 3 customers (JSW, Essar now arcelor Mittal, RNVL)
Increase in royalty by government may impact profitability.
30% export duty on high quality iron ore produced by NMDC , thus making it unremunerative in export market. As of now, Export from NMDC is capped to 3 MT via MMTC, based on agreement between Indian Government and Japan & South Korea, where exports duty is only 10%.
With top customers moving to captive mines (e.g. JSW has won few of the merchant mines bidding in Mar-2020), it needs to be seen how NMDC with find taker of its products in the future.
Iron Ore produced by Orissa Merchant Miners competes with NMDC, and impacts the pricing of Iron Ore. (Orissa contirbutes 50% of iron ore produced in india (110 MT), top players being Rungta (20 MT) and Sirujudin (15 MT))
Open Points that I need to research further:
How does Steel prices impact Iron ore prices? What is the dynamics of steel prices in India? Is it driven by Consortium of major steel producers (like cement industry) or it is driven by market demand and supply?
For how much time Mines are granted for lease and when NMDC mines are coming up for renewal?
Thread on Twitter about ongoing structural changes in Iron Ore Industry by Dr Vijay Palwa.
The company passed a resolution to demerge the steel plant. This will pave way for the sale of the plant for unlocking value.
My first post on VP
When ruling govt was BJP and the current congress CM, both were sending letters to central govt asking them to not sell the steel plant to private players, every time central govt brings up the sale of plant. The CMs know that there would be law and order issues for prolonged periods of time, if the sale is announced. But looks like this time central govt is compelled to go ahead with the proposal as the coffers are getting emptied due to current economic situation. But this is not going to be easy. There would be bandhs, hartals etc and even the regular mining work may come to halt as happened in the past. This is now a double edged sword. The long delay in plant completion has brought the things to this juncture. If the sale really goes on the value of the stock would be atleast 200 rs if we do conservative back of the envelope calculation.
Disc: invested 3-4 yrs back @130. Gradually selling.
