Company update: NMDC (Outperformer) - Iron ore prices shoots up, at 3.5 years high
NMDC’s share price has increased by ~25% from its recent lows in July 2018 due to expectation of resumption of volume growth from Karnataka and higher iron ore prices (NMDC increased prices by ~10% in last month). Though we expect NMDC’s iron ore prices will not sustain once volume starts coming up from Chhattisgarh and Odisha post monsoon but sustenance of higher pellet prices may not lead to iron ore price fall, posing further upside risk to numbers. We upgrade FY19E/FY20E EBITDA by ~15% to factor in higher prices and as a result increase our TP by 12% to Rs172, valuing iron ore business at 5.5x FY20E EV/EBITDA (Rs140/sh) and investments in the steel plant at Rs32/sh (50% of FY20E CWIP) . We reiterate Outperformer rating on the stock.
NMDC raises iron ore prices again by ~6%: NMDC kept on increasing iron ore prices since April 2018 on account of supply crunch, firm demand, increasing pellet prices, rupee depreciation etc. It raised prices further by ~6% (Rs150/t for fines & Rs200/t for lumps) wef 7th Sep 2018 after increasing prices by Rs150/t on 22nd August 2018. Current price stood at Rs3,110/t for fines and Rs3,550/t for lumps. Even assuming a fall of Rs300/t in prices in Q3FY19, we revise upwards our average iron ore price assumption by 14% to Rs2,850/t for fines and by 12% to Rs3,250/t for lumps in FY19. The average price for FY20 stood at Rs2,760/t (earlier Rs2,460/t) for fines and Rs3,150/t (earlier Rs2,850/t) for lumps.
Normalcy returns at Karnataka mines, monsoon affects Chhattisgarh volume: JSW Steel has resumed buying from NMDC’s Karnataka mines from July-end and as a result, we observe an uptick in Karnataka volume (up 3.4% yoy to 1.2mt) in August. On the other hand, the heavy rainfall affected despatches at Chhattisgarh mines and volume dipped 39% yoy to 1.1mt in August 2018. We believe that volume will resume upward movement from Q3FY19 with monsoon subsiding and a low base. (During Q3FY18, NMDC lost 2mt volume due to railway line disruption which is functioning normal now). As a result, we do not expect any downside risk to FY19e volumes of 34mt and 38mt in FY20e (FY18: 36.1mt).
Reiterate Outperformer with revised TP of Rs172: With JSW Steel resuming the purchase of iron ore from NMDC’s Karnataka mines and firm iron ore prices, NMDC is expected to record EBITDA CAGR of 15% over FY18-20e. NMDC’s 3mtpa steel plant is expected to start commercial production from FY21e onwards. We value the iron ore business at 5.5x FY20E EV/EBITDA (Rs140/sh) and investments in the steel plant at Rs32/sh (50% of FY20E CWIP) to arrive at our fair value of Rs172.
NMDC Limited is an India-based company engaged in mining of iron ore. The Company's segments include Iron Ore, and Other minerals & services. It is also engaged in the production and sale of diamond, sponge iron and wind power. Its projects under construction include Bailadila Deposit-11/B, Kumaraswamy Iron Ore Project, 1.2 million tons per annum (MTPA) Pellet Plant at Donimalai, 3.0 million tons per annum (MTPA) Integrated Steel Plant in Chhattisgarh, Panthal Magnesite Project, Screening Plant III at Kirandul Complex, Screening Plant II at Donimalai Complex, doubling of Railway Line between Kirandul and Jagdalpur, Steel Plant at Bellary and Rail Link between Dalli-Rajhara-Rowghat-Jagdalpur Railway Line Project. It proposes to diversify into other commodities, such as steel making raw materials (coking coal, manganese ore nickel); fertilizer raw materials (rock phosphate potash), and thermal coal. It also proposes to invest in raw materials, such as tungsten and rare earth minerals.
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