Event update: NMDC (Upgrade to Outperformer) - Centre removes overhang on future mining renewals

Event

The Central Government of India has amended Mineral (mining by Government Company) Rules, 2015 by exercising power under MMDR (Amendment) Act, 2015. It has substituted word ‘may’ with ‘shall’ in the rules 3(2) and 3(4). This amendment has made mandatory for state governments to extend the mining leases held by Government company. The rules shall come into effect w.e.f 27^th Sep, 2019.

Details

• In Aug 2019, Karnataka Govt. cancelled the lease of 7-mtpa Donimalai mine and put the mine under auction after Karnataka HC put away the special condition imposed by State Govt. at the time of renewal of lease last year in Nov, 2018. Post this, NMDC approached Central Govt and Central Govt put a stay on the auction of Donimalai mines.
• Mineral (Mining by Government Company) Rules, 2015 under Rule 3 and Rule 4 gave an option (ambiguous) to State Government to extend lease period of Government Company by 20 years. Now, Central Govt. has amended the said rules and substituted the word “May” by “Shall”, thereby, mandating the State Govt. to extend the lease for 20 years for PSUs.
• This amendment in rules removes the ambiguity regarding the renewal of mines in Chhattisgarh which are due for renewal in Mar-20 and Kumaraswamy mine in Karnataka in Oct, 2022. Though the amendment in rule is applicable from 27^th Sep, 2019, we believe that Donimalai mines too may be renewed as the matter is still sub-judice.

Valuation & view: Upgrade to outperformer with TP of Rs131

The amendment in Mineral (mining by Government company) Rules, 2015 ensures all future renewal of NMDC’s mines and provides earnings visibility beyond FY20 too. Though we believe that Donimalai mines in Karnataka too may be renewed in favour of NMDC but prefer to wait for clarity before factoring in the same. As clarity emerges on renewal of future mines, we value the stock on earning basis. We cut FY20/FY21 EBITDA by 10% each to factor in weak iron ore prices. However, EPS is increased by 3-4% in each of the year after factoring in lower tax rate (26% v/s 35% earlier). We value the iron ore business at 5.0x EV/EBITDA FY21E (Rs105/sh) and investment in steel plant at Rs26/sh (50% of CWIP). Accordingly, we revise upwards our target price to Rs131/sh (earlier Rs72/sh on P/B basis). Upgrade stock to outperformer. Final approval of Donimalai mine will boost our TP by ~Rs20/sh.