Company update: NMDC (Outperformer) - Key triggers intact; awaiting judgment on Donimalai
We remain positive on NMDC and expect potential upside of ~60%, factoring in favourable outcome on Donimalai mine and commencement of its 3mtpa steel plant by FY20-end. At CMP, the stock is trading inexpensive at 4.1x FY20E EV/EBITDA. We reiterate Outperformer on the stock with a target price of Rs168.
Temporary disruption at Chhattisgarh mines; No impact on FY20 volumes: NMDC has restarted operations in Kirandul complex after it halted mining on 7th June amid protest by local tribals. The protest was to stop future mining at Deposit 13 (non-operational mine in NMDC-CMDC JV with Adani Enterprises as an MDO) which was earmarked for meeting iron ore requirement for upcoming 3mtpa steel plant (details on next page).Temporary halt of operations by NMDC shall have no material impact on NMDC’s iron ore volumes. NMDC has sold 6.0mt during Apr-May (Chhattisgarh -4.8mt, Karnataka-1.2mt), up 33% yoy despite suspension of operations at Donimalai mine. We expect NMDC to achieve volumes of 35.8mt in FY20E.
Expect favorable outcome on Donimalai mine within June 2019: With Karnataka High Court resuming office post summer break, we expect judgement on Donimalai mine to be announced within June 2019. We have factored in favorable judgement and accordingly factored in resumption of mining from the Donimalai mines from Q2FY20 (4.5mt in FY20e). A favourable outcome should set precedent for future lease renewal of NMDC’s mines in Chhattisgarh and Karnataka as majority of its Chhattisgarh mines are set to be renewed by Mar’20 and Kumaraswamy mine at Karnataka by Oct’22. An unfavourable outcome would be detrimental to merchant mining operations in India.
Reiterate Outperformer with a target price of Rs168/sh: Besides improving macro for iron ore, the immediate trigger for the stock is favorable outcome on Donimalai mines which will subside concerns on future lease renewals of NMDC’s mines. Non-operation of Deposit 13 mine shall have no adverse effect on our estimates till FY21E as no production from this mine had been factored in our estimates. The start of commissioning of its 3mtpa steel plant (expected by Q2FY20-end) will boost confidence in start of commercial production from FY21e. Any delay in auction process in Odisha merchant mines leading to supply disruption in near term could be beneficial for NMDC. We reiterate our Outperformer rating on the stock with TP of Rs168. We value the iron ore business at 5.5x FY20E EV/EBITDA (Rs141/sh) and investments in the steel plant at Rs27/sh (50% of FY20E CWIP).
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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