Hi - Has the Karnataka High Court order out? Any idea when this is anticipated?
Will the recent election results have any bearing on NMDC? If there is a change in Karnataka govt, would that mean Donnimalai will be operational soon after that? That would be a trigger for this stock. Another trigger would be the steel plant coming online. However, can the steel plant become an albatross for NMDC? What is the likelihood of that happening? NMDC was talking about pulling in a strategic investor? Wonder if they are still pursuing that route?
NMDC is currently trading at a Market Cap of 33500 Crores. Out of this the steel plant has a value of close to 15000 Crores (https://www.business-standard.com/article/companies/nmdc-s-new-integrated-steel-plant-to-add-1-7-bn-to-topline-119041100211_1.html)
Co has operating Cash Flows of an Average of approx 3000 Crore for past 5 years. So right now company is trading at 10 Times Op Cash Flow, with no value being assigned to Steel Plant. I am Ignoring Cash in hand, because it will be required for completing the capex, paying dividend etc.
Now following scenarios can happen
Scenario 1
Co starts production at Steel plant in FY 20. The steel plant has been built at huge cost and is very delayed. Steel coming out of it would be mostly non profitable because cost is high, whereas sales price is market driven
In that scenario, the current Op Cash Flow will take a hit and most probably what looks like a 10 times Op Cash Flow valuation may climb up. If Steel plant looses 1000 Crores a year, the valuation could climb to 15 times cash flow, which is still reasonable. So even if Steel Plant looses 1000 Crores cash a year, downside from this value looks limited
Scenario 2
Co makes losses from steel/minor profits but that is compensated by higher profits from Iron Ore business. Management has been guiding at higher production and sales volume.
In that case the situation will again boil down to âAre we getting Steel plant at Zero valuationâ
One may check recent interviews of management on CNBC etc where management is really bullish on clocking atleast 10% sales growth (without even Donimalai mine opening)
Scenario 3
There are many recent news paper articles saying that NMDC may sell off steel plant
If this scenario plays out, then NMDC may get anywhere between 7500 Crores to 15000 Crores , depending on the % divested. More importantly there will be a new Non Zero Value assigned to NMDC Steel plant.
Lets work with the figure that Steel plant is valued at 15,000 Crores itself during sale (the value in books i.e. no profit no loss).
PS : Selling a govt company at losses will invite wrath of CAG, opposition, Left Wing, Right, Wing, everyone
In that case you are getting Iron ore Business at 17000 Crore Value with an Average Op Cash Flow of 3000 Crore
Addtional Issues and Optionalities
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Donimalai Mine is decided in Coâs favour - https://www.thehindubusinessline.com/news/national/why-is-the-verdict-on-karnataka-mining-casecrucial-for-nmdc/article26053112.ece
This will add production and sales to company kitty and will clinch valuation in our favour -
Mining Lease Expiry : As per MMDR Act, Merchant Mines are about to get expired in March 2020.
Before the expiry, merchant miners may want to extract as much mine as possible and sell to plants at distressed value. This will keep iron ore prices of India depressed and hence earnings on NMDC depressed -
Merchant Mines being auctioned may be won by existing customers of NMDC, thus impacting future sales and profitability.
Disclosure : Invested
Inviting Thoughts
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A good news with some important data points on captive vs merchant mining
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This is a very important and lovely article. Must Read
True. When one looks at the laws framed, its really tough to figure out things and practical aspects.
Given the way the things are today, if the lease of these mines doesnât get extended, it should be a big short term benefit for players with operational mines (NMDC, Sandur, players with captive mines etc). However, as there is still time and this is an industry with lots of regulations etc, one never knows
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Now the article is available completely for everybody
Notes from Annual Report 2019
- Operating Cash Flows of 6650 Crores (that makes the stock trade at 5 times Op Cash Flow)
- Continuous thrust by the government to use domestically manufactured iron and steel products in government procurement, as well as anti-dumping restrictions on steel imports in the country on account of measures being taken by Government of India bode well for NMDC and the iron ore mining industry
- We are already Indiaâs largest iron ore producer, and going forward, we are targeting
substantial increase in mining capacity by improving our evacuation capabilities in Chhattisgarh by doubling the KK line from Kirandul to the Jagdalpur line by 12 MTPA in our existing operations. - Steel plant will start in FY2021
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ThanksâŚA few more points, maybe repeated here
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Big picture- Capacity expansion from 43MTPA to 67MTPA by FY22. This includes 15MTPA new mines and 9MTPA expansion on existing mines. Pellet plants of 1.2MPTA pellet plant in Donimalai + 2MPTA at Nagarnar. Steel plant of 3MTPA by FY21
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Global avg Iron Ore price- 83$ in Jan-March 2019
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Higher domestic supply till March 2020 followed by cuts due to delay in auction of iron ore lease
Risks-
- Backward integration by steel players. 2 major customers Essar and JSW already acquired mines in Odisha Karnataka through auction route. JSW already started production and plans to increase it
- Increased production from competition. India total Production FY16=155MT, FY19=210MT
- Weaker global outlook of iron ore trending to 60$ over the next 2-3 years was pushed out by 1-5 years due to Vale accident etc
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CAG has said NMDC claim of 67MTPA is frivolous and has been said without data backup. The CAG report on nmdc is available on their website
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Hand is fighting the leg. Itâs all the more puzzling because now both Central and State govt belongs to the same party. Hope this is resolved at the earliest. Wonder what the revenue loss is for the state govt, central govt and NMDC due to this.
Good news
Neutral to good news:
Disclosure: invested
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Can anyone analyse the impact on demerger on share price.
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Let me try to answer this - the appetite for good steel plants is evident from Arcelorâs bid for Essar.
Based on latest financial statement of NMDC - the total investment in the Nagarnar plant is Rs. 14.3K Crore and based on reports, they will need to invest an additional 7.2K Crore to get the plant functional. So at the time of commissioning (by June 2020) the book value of the plant will be about 20 to 22 thousand Crore. With out getting into too much details - if SAIL or a private player is ready to take over the plant paying book value we can assume a total inflow of 20-22K Crore to the company. Note that the current market cap of the company is about 30K Crore. This cash will be paid as dividends/ buy back(considering thatâs the real intention of government).
Disclosure: Invested a few years back - the reason for investment was this plant and the value unlocking opportunity (though the expected investment in this plant at the time of my investment was much lower) - continue to hold.
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Some part of the thesis is playing out as we speak. Nmdc has already taken two price hikes in January 2020.
There could have been a longer disruption, but govt has allowed seamless transfer of EC and Forest Clearance for existing mines. I still feel part of disruption will happen.
Anyone who wins the bid, would have to do paperwork, arrange new machines, negotiate with contractual labourers, do paperwork etc. This takes time and would result in temporary disruption of supply.
At the same time price has run up substantially from the lows (abnormal lows).
The Steel plant is yet to be capitalised and even though it is listed for divestment, most analyst reports have put a zero figure to this plant while setting price target for NMDC. I for one feel that this plant should be valued at north of 7500 crores (a 65-70% discount to Construction cost).
From hereon, a lot depends on following
A. How soon supply disruption gets back on feet
B. What does Steel cycle do
C. What does Govt do with Steel Plant
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So many positives seem to be happening for the company - 1. Growth in production (hopefully with restart of Donnamalai, there will be material growth) 2. Better realisations 3. Disinvestment of steel plant. Yet the stock has been languishing and trades at really cheap valuations with high dividend yield. Poor govt policy leads to FPOs at such low valuations and remains an overhang.
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Hi Ayush,
JSW (Group) (27%) and Essar (23%) accounted for 50% of NMDCâs offtake in FY20 (9M). Both are aggressively bidding for captive mines with JSW might soon be able to get its complete iron ore requirement. Isnât this something structurally negative ??
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