ValuePickr Forum

VP Virtual Meetups

2020 has been a year where after many years, we were not able to have the VP annual meet in person. The annual meet not only provides a dedicated time and space for the top collaborators to meet and share their knowledge, ideas and enthusiasm. It also works like a kick-in-the-butt for people like me to see newer and (mostly) younger people doing exemplary work.

We wanted to recreate a similar version this year. But since meeting physically was not possible, we decided to do zoom meetups and are currently doing it monthly. People who work hard and bring out unique perspectives in a business are requested to join. As before presentations are done as teams and everyone is expected to do a pre-read of the company so as to be able to ask meaningful & thought-provoking questions.

The first session was held on 30th October 2020.

  1. Sandur Manganese - Ayush , Sandeep Patel, Harsh Beria

  2. Ferro Chrome industry and IMFA - Anant, Harsh Beria


These discussions are discussions among VP Collaborators - a small group who like to take forward each others work, and are shared for educational purposes only. These are not recommendations. The same is being shared on VP forum as a giveback to the overall investment community. Do NOT rush in to invest or trade based on any companies discussed in any of the subsequent posts. Do your own due diligence or speak to your financial / equity advisor before investing. Some or all participants may have positions in the stocks that they discuss and may change their views without updating the thread or informing anyone.


The first presentation was from Team Sandur :wink: comprising of Ayush, Sandeep and Harsh.

Attaching the presentation here.
Sandur presentation VP group Oct 2020.pdf (2.8 MB)

The full transcript is below:

Team Sandur
So, quickly to get started, what does the company do?
Basically, Sandur is a Karnataka based iron ore miner. It’s a merchant iron ore mining company. And they produce almost 16 lakh metric tonne of iron ore per annum, they also produce almost 2.5 lakh tonnes of manganese ore, and they also have a ferro alloy plant in which they are producing close to 30- 35,000 metric tons of ferro alloys, which is backward integrated with 32 megawatt power plant captive power plant, this is a coal based power plant. And this plant was set up in early 2010, or something. Iron ore extraction is fully mechanized. And I would say they have a very high efficiency and very good margins in this business segment. Manganese ore extraction is semi mechanized but I believe they must be doing pretty good here also. Because in the mining segment, they earn pretty good margins overall. This segment is a cash cow for the company!
So the company is undertaking a large capex in two phases. In phase one, they are spending close to 600 odd cr as of now. And then there’ll be another part to this capex. So one good thing which I find interesting is that it’s a company which has a rich legacy of over 100 years and is honest in its operations. The problem in this sector has been that we all must have heard about the Bellary mining scam in which the mines were exploited by several people, and Supreme Court had to come down heavily on it and in 12-13 period SC banned a lot of mines till illegal mining was being probed. So there are mafias, and bad elements who operate in this area. So there are very few people who do this honestly, and that is why this industry is not considered to be very investor friendly or very transparent. However, in the case of Sandur, there are lots of articles which talk highly about the company and the founders. And they own these mines from more than 70-80 years. And over the years, they have given up the mining right to the government voluntarily, and have dealt very nicely. And if you closely look at the annual report, one will see that they spend a lot of amount on employee benefit, expenses, welfare, etc and there’s a high amount of fixed cost that goes into operation just for the benefit of the mine and upkeep of people by giving free food and all those things. In fact, there is a good corporate video and brochure available on their website and it will be interesting to spend some time on it. The company initially had over 7000-8000 hectares of mining area. However, they gave up a large part of it voluntarily to the government over the years and now they have almost 3200 Hectres of mining lease in this listed company. And today the market cap of the company is just 600 cr. Till a couple of years back it was a debt free company with over 200 crores of net cash and balance till last year. And they are investing this cash flow into a large capex which is underway and we’ll discuss more about it going forward.
Today morning only I was reading this credit rating report and I was not aware about two things and I thought of highlighting and sharing the same - Sandur is the fifth largest iron ore miner in Karnataka and the largest private miner of manganese ore in India. And if one will read the credit rating report, one will get that same feeling that the company has a very strong rich heritage and they get a good credit rating, despite such a large capex underway.

Quickly coming to quantitative data. This is an important slide to focus on. So how has the production been over the years, so between 2004 and 2011, this is one phase that we can focus on initially. I find it interesting to see that between 2006, seven to 2011, the production increased almost four times from 4 lakh tonne to almost 15.8 lakh tonnes.
So, basically every mine has an environmental clearance (EC) limit upto which they can do the production. In the case of Sandur they had approval for production of upto 16 lac tonne. And they had reached full capacity in 2011. And then this huge fall happened in production, which is out of the control of the company because of the huge mining scam that happened and all of sudden SC banned all the mines in 2012 abruptly and no production was allowed. And this was resolved in 2013 late or early 2014. But in the case of Sandur, the good point is that Sandur was one of the first company to get this approval to resume mining and it was one of the few companies to get A category rating, which means that they have not done any exploitation or wrongdoing in the mine and they have followed the norms. And so they were the first one to get out of this ban. However, there was a production cap put on the company initially, so for next three years, the production couldn’t be more than 7 lac or so and then in 2017 the cap was lifted partially. So, that is where you see 11 lac tonne production, but the moment they got the removal of the cap, they have been producing 15.8 lakh tonne, 15.9 lac tonne. So what I like here is that demand is not an issue, company wants to produce as much as they can as they have huge amount of reserves. The problem is that they have a production cap due to the EC limit at 16 lac tonne which was there based on their earlier capacity in 2010. And they have been wanting to increase this production capacity to 40 lakh tonnes and they have filed for an EC approval, which has been pending for the last 3-4 years. Another interesting thing is that in 2018-19, if you carefully read the content, annual report or quarterly results, basically one will see that in first three quarters, they do high amount of production, and in last quarter, they do low production because they want to do more production, but every year they hope they’ll get an expansion of the EC limit, which hasn’t been happening, and they reduce the production in the last quarter. So it’s a very interesting company wherein demand is not an issue, if you will see the balance sheet receivables are less than 10-20 days. So they get payment on kind of advance and then they supply the material. This business segment has a very high ROCE and is a cash cow.

Generally what I’m seeing is that people feel it’s a very cyclical industry. But I somehow differ on this view, because see, till 2011, the productions were very good. Between 2012-16 like I shared the reason we should ignore this period. And if we ignore this period, then production wise, I don’t see much of an issue for the company, as they are doing the maximum production they can do. Also, if you look at the realization, 2013 was an aberration. It was an aberration, because of the mining ban, suddenly the production was not there so the prices went through the roof to 3300 rupees per metric tonne. So we can ignore this data. And similarly 2016 was an aberration because in 2016 if you all will recall, it was the worst year for the steel industry. Steel industry was in a big, big downturn and trouble so for that one year when the prices were very, very depressed and everyone was making huge losses, iron ore prices also fell off. Barring that broadly if you see the realizations hovered between 1800 rupees to almost 2200 rupees per metric ton. And if these are the stable price range, then I feel that it really doesn’t matter because this company makes almost 40% kind of EBITDA in the mining segment. So, how does it matter if the prices fall by 10-20%, the margins will only fall to 25 30%.
Here is the quick iron-ore International pricing trend. Iron-ore has been doing well for last five years However in India the pricing is totally disconnected, because export from India is not allowed from several regions or there is a very high export duty and nmdc is the price decider for this industry.
So mining business being the cash cow is one important part of my hypothesis. So if you look at the margin profile in the mining segment, it has been over 40 50% for most of the periods except period of disruption of 3-5 years when they were not operating at optimum utilization and this also tells us that there is a high fixed cost of running a mine. And once you scale up, you get operational leverage. Basically what happens there is a mine running expense, which is a fixed cost, you have to take care of so many employees and all those things. But once you reach an optimum utilization, you do pretty well. So the company is doing more than 40% margins consistently. Also, if you see the ROCE, it’s very high. It’s a cash cow basically. capital employed would be a negative value for some of the years. Yet, for a company, which is earning close to 100-125 Cr from mining business, where it doesn’t need to re-deploy money, yet the stock is trading at just 5-6 pe multiple and a Mcap of 600 Cr. Maybe the earlier argument would have been that growth is not there, but that would change now.
Now, the company is doing some major capex. So for a company which has never invested in the past for expansion for the last 10 years, is expanding the gross block by 10 times! The net block which was 80 Cr will be almost 800 crore. This is something very interesting that I see. And they have done a borrowing of almost 400 Cr and the debt:equity ratio is still reasonable at 0.50 so it’s not out of the place. Now, Sandeeo will take over and share what he sees on the capex side and what are the expectations?

Team Sandur
Okie dokie. Where were we in the previous slide? Gross block increased from approx 80 cr to 800 cr. When we hear this, immediately the first question that comes to mind is what is happening here? This is a sector known for NPAs and bankruptcies. Gujarat NRE, Bhushan Steel, Ferro Alloys Corporation, and many other examples. Common characteristic being high debt and capex heavy expansions. So the key question to ponder is - Why is Sandur venturing into capex heavy manufacturing-led business from asset lite mining-led business? Particularly when the latter has been a high margin business for Sandur. Sandur is doing this to meet two objectives - one short term and other long term. To reduce power cost is a short term objective. To create captive use of iron ore is a long term objective.
Let’s look at the long term objective first. The lease for the current mines expires in Dec 2033. Mines will go up for auction then. No guarantee Sandur will get it back. Premium will be paid for these mines in future, going by the history data of mine auctioning in Karnataka. Premium could be 15% to 50% to anything. Sandur needs to do something today to de-risk this event. Basically, set up a business which in the worst case can sustain on its own. Thus Sandur applied for 1 MTPA (million ton per annum) steel plant and received EC approval for it. So if Sandur has captive use/consumption of iron ore, then in 2033 it will be in a much better position to bid as well as retain the mines. Mine reserves are not going to get over in 2033 the way the company has been mining. Sandur knows these mines well and thus makes sense to try to retain them when it goes up for auction.
Coming to the short term objective, Sandur has a ferro alloy manufacturing plant. It is an electric arc based plant. Requires reliable power/electricity. Power availability is the key. Thus has 32 MW captive power plant. No dependency on grid. It is a thermal (coal) based power plant. Cost of power is INR 5.5/- to 6/= per unit. Grid cost is around INR 8/- per unit. Cheaper than grid. However, still it is an expensive power. The primary expense is INR 70-80 cr of coal consumed in the power plant. Not a small expense. Have to think of some option to reduce this expense. One such option is Coke Oven plant. Anyway coke will be required for the 1M steel plant. The coke oven plant generates heat/steam/gas, as by product, which can be used to run turbines of the existing power plant. The boilers of the existing power plant can be shut down or put to standby thus saving 70-80 Cr coal consumption/expense. Kill two birds with one stone.
At a high level, the entire project is divided into three stages. Stage 1 consists of i) setting up a 0.4 MTPA coke oven plant and ii) refurbishing the furnaces plus installing a new furnace in the ferro alloy plant. Around 600 cr capex (400 cr debt and 200 cr internal accruals). Almost done. Half of this is operational and the other half would be by end of Cy2020 or early Cy2021. When the coke oven plant is fully operational and stabilized, then the 70-80 cr coal expense saving will be achieved. Coke oven plant converts coking coal to coke. Coke will be sold to steel plants in the neighbourhood for now; and will be locally consumed once own 1 MTPA (million ton per annum) steel plant is up and running. Should not be much difficult to sell coke as India is a net importer of coke for now. Margin is around 8-10% in coke.
In the Ferro alloy plant, co has refurbished the existing furnaces which should reduce downtime and increase availability going forward. These furnaces produce one product i.e. Silico-Manganese; it is Mn alloy. A dedicated new furnace has been installed to manufacture ferro silicon (alloy) going forward; this is a part of stage 1 project. This will facilitate an additional revenue stream.
Why 0.4 MTPA size coke plant - why not bigger or smaller? Because this size plant generates enough coke to support a blast furnace based 1 MTPA steel plant. And this size plant generates enough gas/steam to support a 32 MW thermal power plant. A nice intersecting point. A standalone coke oven plant that does not have productive use of gas/steam generated in the process is a dull proposition (inefficient capital allocation). Sandur is lucky to have a 32 MW thermal power plant which can make productive use of gas/steam. Setting up a brand new 32 MW power plant requires ~200 Cr new capex if any co wants to do it today. The existing assets of Sandur makes the coke oven plant an attractive proposition. Also Sandur is lucky to have its own mines and ferro alloy plant to consume the electricity generated by the 32 MW power plant.
Stage 2 is about setting up 0.5 MTPA iron making plant. Will require an additional ~700 Cr capex. Followed by a conceptual stage 3 i.e. 0.5 MTPA steel making plant.
How much iron ore is required to run 1 MTPA steel plant? Roughly 2 MTPA (depends on ore grade). Sandur has EC approval to mine 1.6 MTPA iron ore p.a. currently. Sandur has applied for an additional 2.25 MTPA p.a. iron ore mining to MoEFCC and CEC; EC is awaited. Post this additional mining approval, the new coke oven plant, the coal expense saving and the refurbished furnaces in the ferro alloy plant, the scale of the company’s operations is going to appreciably increase in near future (stage 1). Followed by further increase in stage 2, stage 3 and so on.

Team Sandur
Yep. The biggest potential trigger is approval of expansion of iron mining from the current 1.6 to 3.85 MTPA because they will need this for the 1 MTPA steel plant, which is something in the distant future. But it’s still something very, very important that they need to get this iron mining capabilities right now so they can generate 100 to 150 crs of additional bottom line. With heat recovery system and the coke oven plant they are setting up, their alloy business will finally be profitable. So the power is basically used inside and they don’t have to pay for power costs additionally, and then the large mining expansion they are expecting will increase manganese ore production from the current 0.6 MTPA. And finally, their huge capex is towards making alloys. They can actually be much more cost competitive and the alloy division will become profitable.

We talked a lot about upsides, what can go bad? They are not backward integrated in terms of coking coal which exposes them to foreign currency risk. Plus the commodity price fluctuation of iron and manganese. Plus they are trying to do a very large debt funded capex, which when combined with a long cyclical downturn, especially when capacities come on stream, can make interest servicing hard. The new CEO is 26 years old and likes to play golf. Hopefully, he also knows the business well enough. Another thing about this sector is political interference. The whole family was affiliated to Congress in the past. Issues of large potential contingent liabilities can also crop up, which happened in 2005 when the company had to pay around 113 cr. of contingent liabilities to the forest department. So you never know when this kind of figure hits the company. If it’s hundred crs, it’s more or less a year’s profit. Commodity prices in Karnataka can sometimes be delinked with international prices. This is something which I don’t have the best grip on. But still, it’s good to know. And finally the promoter pledge, although that’s non-market linked and does not depend on everyday stock price movement. I think that’s all the risk elements which I could think about.

Team Sandur
So as we are out of time, I’ll just rush through a couple of slides. This is a slide which shows that coal prices have fallen fast in last one year, so maybe their coke oven plant is not best placed as of now. As of now, we’ll have to watch out for the economics, what can be the numbers in FY 22. When things stabilize, so company has been making announcement that they will grow from 600-700 cr revenue today to 1700 cr revenue. And based on that we did some calculation, and if they do 1600, cr revenue, EBITDA will increase from 200, cr, as of now to 400-500 cr. And they can do a pat of 220 Cr or maybe 300 cr optimistically, on the higher side. I could attend the AGM and I was very concerned about the young MD. However, it was a bit soothing to see that he gave a lot of time and he provided lots of answers for over one and a half hours. And also they provided updates that the phase one of the capex is going pretty well. And they are doing very high operational efficiencies as of now. And a plant is operating at more than 90% in the phase one and the next phase of expansion will be completed by November, December this year. Yeah, and another small interesting slide, the earnings have grown yet the P has collapsed in recent years. These are some interesting resources that readers might like to read data. That’s it from my side.
How can the audience help? Maybe you guys can be do research about these two, three things. That’s for my side, I think we can open for questions

What is going to trigger for the stock?

Team Sandur
triggers will be two, I think, first is the benefit of capex - 50% of the phase 1 of capex is commercialized now. So in this September or December quarter, we’ll get some glimpse of it, how is it going, we will get to know if things are on track and look ok and hopefully they haven’t messed it up. As and when the full capex is complete and stabilized, and if they deliver the expected benefits, it will be a huge trigger as it would add maybe 100 Cr of profitability. People are concerned on coke expansion and they feel company might loose money. So it will be important to see the numbers. And second biggest trigger is if they get the approval for mine, because that’s like a cash cow and the cash cow will just double!
I missed to mention if you think even longer, here is a company which is doing a 1 million ton steel plant in next five, seven years. And if they do it slowly block by block, then this company even has the potential to do 4000 cr revenue in seven, eight years. So can the MCap remain so low?

I think two questions. So one is that after this phase-1 capex in the next phase 1 million steel plant, don’t you guys think that for this 1 million ton capacity of plant and the kind of RoCE that a typical steel company earns, it is suboptimal in terms of your capital deployment, considering the kind of fantastic business that you have on the mining side, it will bring down the overall RoCE of the company. And if I look at the numbers, it still doesn’t solve the problem, they still have to sell iron ore in the open market, right? The steel plant will not consume everything that they produce. So, that is one worry, in my mind that you are deploying capital into a suboptimal RoCE business where you don’t have scale, you don’t have advantage, and typically, that industry has been, you know, in a bad shape. So why do that? Why spend money there? So that is one question. And second one is on you know, so if I was reading on this company, I understood that the quality of the iron ore is different and the finesis much higher there. And so how do you track the prices on the benchmark basis? Is there any variation in the prices versus the prices what nmdc announces? Or how do you determine the price for the iron ore that is produced by the company? You know, what price to take into account?

Team Sandur
Yeah, so let’s start with the first question. There is absolutely no-doubt that the manufacturing-led business cannot match the existing high return ratio of mining-led business. Existing mining operations which are based on old lease has been an extremely high return ratio business. However, this would not continue forever. It has finite lease life. Lease will expire in Dec 2033. Need to do something today to be in a good position then to win the mines back, most likely by paying a premium. So that “do-something” is set up a business which in the worst case can sustain on its own. Thus iron making plant and coke oven plant thought process. These plants would not make much sense if viewed standalone; will give an impression of not so efficient use of the capital. But when viewed in conjunction with the assets that Sandur has, it makes sense. And everything-together becomes a decent IRR business proposition.
Company was at a stage where it had to decide between the two options -
Option 1: Do nothing; existing high RoE/RoCE (mining) continues and then drops to zero in 2033
Option 2: Forward integrate; existing high RoE/RoCE tapers to a decent level and continues/ sustains for a long time beyond 2033
How to assign terminal value to option 1 is unclear. Whereas option 2 has a decent terminal value. Sandur decided option 2. Had they remained on option 1, then we investor community in 2033 would have questioned - why co did nothing when writing was on the wall.
Let’s see why this sector has got a bad name. Mainly because of Bhushan, Falcor, Guj NRE type examples. All these were high D/E cos. Debt is not bad, if supported by equity. Sandur is taking debt while maintaining a decent gearing ratio (D/E). The existing mining operations throw decent cash. This cash will be reinvested for longer sustenance of the overall business. Leverage is taken to accelerate the sustenance process. Co will take debt, repay, take new debt, repay and the cycle will continue for a couple years. In this process, the texture of the co is going to change for good in all likelihood.
Coming to the second question, about grades and pricing. International iron ore price is not a good reference point to track. Makes sense to track iron ore prices for auctions done in Karnataka. Specific state level pricing. This is published by Indian Bureau of Mines (IBM) periodically, albeit with 2-3 months lag. Why Karnataka specific price? Because Sandur can only sell through Karnataka specific auction platforms. Sandur iron ore has around 58-63% Fe content with a typical lump-to-fine ratio of 1:2. Iron ore realization for Sandur has been INR >2000/- per ton for the last three consecutive years as can be seen in Ayush’s slides. Implies some level of price consistency for the grade they have.

just one thing , my understanding was that the way this whole thing happens. Iron ore is procured through auction process and everybody or anybody from India who is there on that MSTC platform can procure iron ore right? So why is it that the only Karnataka pricing is different from the one that is determined through auction?

Team Sandur
Yeah, so buyers can be from anywhere. But there is a mandate to sell ore only through the centralized state level auction platforms; at least in KN it is a rule. Thus Sandur has to sell through KN auction platform. KN iron ore prices that are published by IBM is a good datapoint to track.

Team Sandur
and there is a very high logistic cost to transport iron ore. So, because of this local players will prefer to buy from Karnataka that is how it has been while from Karnataka exports are not allowed and all those restrictions are there so pricing in Karnataka is based on lot of local factors.

The one of the biggest challenges with this company in the past was the regulation regulatory problems the court orders now, that is a kind of thing, which is very unpredictable in India, right? So, you cannot make a plan keep next five years we will do this because you don’t know what supreme court or what the national green tribunal or somebody else will come and do something. So, what are your thoughts on that?

Team Sandur
Oh, I think this is the biggest risk in this whole story because here’s a company which is doing an aggressive capex and God forbid if something goes wrong to the mining part and the cash cow gets affected, then things can turn bad overnight. At the same time, what I just feel is and everyone interested in Sandur should go through the supreme court documents which are available in the public domain and go through the EC filing details and one will appreciate that the model has been tested and now validated by SC. SC had done a very detailed re-evaluation and Sandur got the highest rating and since last few years they have been getting 5 star rating every year. This is very rare as there are very few mines in India to get this category and certification. So I don’t think that overnight issue will come again, maybe the probability is less than 1% now, because things are governed by law and rules can’t change overnight or be disrupted if there is nothing illiegal.

Right. Right. Got it. And see the other problem with typically these mining companies is political interference. Right. I think you covered that also briefly in your presentation. And you said that they were previously aligned to the Congress. Now looking at the political scenario in the country, how is that going to affect them? Or you know, are they now equally disturbed? Or how is it

Team Sandur
so the first thing I would like to answer is that I could speak to industry people and the feedback was good that it’s one of the most compliant company and they pride themselves. Their EC file is pending because they are not taking shortcuts and going as per law.
The family was part of Congress and one of the founders was FM of Karnataka earlier. But yeah, political risk could be there and one good news is, I think one of the key people of the family joined the BJP when the recent elections happened. So I don’t know. Let’s see.

a very basic question, if my understanding is correct, currently Karnataka miners cannot export out of Karnataka. But can other miners sell in Karnataka? Can you explain that? And is that perhaps the reason that the pricing or the realization is fairly stable because Karnataka is sort of ring fenced from external competition and from other players? And the second question was given they are from the royalty Do they have any other business interests and how big for a significant reason some do for them from an overall perspective?

Team Sandur
I think policy in Karnataka is very flip flop and badly placed, others can sell in Karnataka but Karnataka companies cannot sell outside. So pricing remains subdued.
They don’t have any other material business. I think they have a small heritage Hotel, which is on the Maharaja property. That’s it, but I don’t think so they have any other major business, they have a commercial building, which they have leased out and they get some income in this company.
it used to be a professionally managed company until this summer, the royal family has joined it.

Yeah. So I was looking at Manganese ore. Have you guys done some further work on this market because it looks like Sandur might have almost 10% of the Indian Manganese Ore market? If it does to like 2,85,000 tons and Manganese Ore total market is 3 million tons, then that’s like quite a big thing. And if Sandoz can increase the manganese ore production, they’ve mentioned manganese ore grade improvements possibilities, so, have you guys done any further work on that front that throws up some data points, will that be possible to factor that in, at some point.

Team Sandur
So we shouldn’t really bank on the manganese business because first of all their ores are very low quality and India only sources one third of its manganese requirements domestically, while the rest two-third is imported, which go into operations requiring higher grade magnesium, which is not available in India. Plus extraction of ore is a very manual process and cannot be scaled up quickly.


The second presentation was primarily from Anant.

The details are at