MOSL: NMDC (Buy)-Iron ore pricing improving-Highly profitable steel project, albeit delayed, is available for free
NMDC: Iron ore pricing improving; Highly profitable steel project, albeit delayed, is available for free
(NMDC IN, Mkt Cap USD6.2b, CMP INR129, TP INR187, 46% Upside, Buy)
Pricing power returning – mines take price hike in December
- Indian iron ore miners are gaining pricing power again, as some of the mines in Odisha are shut, international iron ore prices have moved up, and demand is increasing (as Indian steel mills are trying to boost production in a seasonally strong part of the year). We expect Indian iron ore supply to get tight over the next 2-3 years, with leases of a number of private mines expiring by end-FY20 and increasing domestic steel production. NMDC has increased prices by 10-13% (Exhibit 4) with effect from 1st December 2017, but it remains competitive with respect to imports for its key customers (Exhibit 7/8).
Capacity utilization to improve as demand is rising sharply
- NMDC has iron ore mining capacity of 46mtpa, but utilization is only ~80%. We expect utilization to improve gradually to 100% over the next 2-3 years, as its key customers (JSW steel, Essar Steel and RINL) are all ramping up production. There will be additional demand of 15-20mtpa. NMDC is well placed to serve them due to its high quality of ore and access to rail infrastructure. NMDC is also investing in doubling of the KK line to improve evacuation from the Chhattisgarh complex.
Steel plants, albeit delayed, will be highly profitable
- NMDC is setting up a 3mtpa steel plant at Nagarnagar, Chhattisgarh, which is 290km away from the Vizag port. The steel project is running behind schedule and likely to start production in FY20. However, the steel plant is likely to be highly profitable because (1) equipment and technology are supplied by high-quality European players, (2) the economy of scale will be high at 3mtpa single 4,500 cubic meter blast furnace, (3) it is in proximity to mines and ports and (4) it has captive iron ore mines. Iron ore will be supplied from Deposit 13. The mine has 325mt R&R and 10mtpa EC, and lease for 50 years starting January 2017.
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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