Event update: NMDC (Outperformer) - Favorable judgment removes uncertainty onfuture mining
Event
The Karnataka High Court ruled in favour of NMDC today and quashed the Karnataka Govt’s demand to pay 80% of iron ore value as lease rental while renewing NMDC’s Donimalai iron ore mine for 20 years on 3rd Nov 2018.
Key Details
- NMDC’s Donimalai mine has 7mtpa mining capacity. NMDC stopped mining at this mine from 4th Nov 2018 after the state government has renewed the lease of the mine for 20 years with a condition that NMDC has to pay 80% of iron ore value as lease rental.
- The state government may appeal against the order in the Supreme Court. However, we have not factored the same and assume that NMDC will start mining at Donimalai soon.
- The outcome of this case has set precedent for future mining renewals. We do not forecast any adverse issue in the renewal of other mines for NMDC. Majority of NMDC’s Chhatisgarh mines are set to be renewed by Mar’20 and Kumaraswamy mine at Karnataka by Oct’22.
Our view: Retain outperformer with TP of Rs168
We have already factored in resumption of mining from Donimalai from July 2019 and accordingly pencilled in 4.5mt volume in FY20e and 6.0mt in FY21e from it. This judgement removes the major overhang on the stock as any adverse judgement could prove to be fatal for future mining operations of NMDC. We expect NMDC’s domestic iron ore prices to remain firm in FY20. The next trigger for the stock will be the start of the commissioning of its 3mtpa steel plant, expected from Q3FY20. 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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