Analyst Corner: ‘Buy’on NMDC, stock value at Rs 111/share
NMDC is currently shipping about 23 mtpa iron ore from this complex. In the worst case, if outcome in the Donimalai judgment is not favourable, NMDC will still have 17 mtpa profitable capacity.
Donimalai and Kumarswamy are NMDC’s two mining leases (ML) in Karnataka with permitted annual production of 7 mtpa each. Donimalai operations are temporarily shut pending a hearing in the high court regarding the unreasonable demand of 80% share in revenue as a condition for renewing the ML.
Management is very confident of winning the case because (1) this judgment will have unprecedented impact on all the PSUs, (2) the mining act doesn’t provide for it, and (3) it will stifle merchant mining. The next court hearing is on January 22, 2019.
Two MLs with a total capacity of 17 mtpa have already been renewed, which is half of current production. ML of 7 mtpa deposit 11B is valid up to Sept 2037 (20 years) and 10 mtpa deposit 13 is valid up to 2067 (50 years). Renewal of other leases is in process.
NMDC is currently shipping about 23 mtpa iron ore from this complex. In the worst case, if outcome in the Donimalai judgment is not favourable, NMDC will still have 17 mtpa profitable capacity.
Further, NMDC is confident that the Chhattisgarh government will not be as demanding as the Karnataka government. The Chhattisgarh government is aware that MLS will not fetch much price from private miners in the auction because of the Naxal problem in the area.
NMDC has already dispatched 22.1 mt in nine months and is targeting another 9 mt dispatches in Q4. A slightly better volume can be achieved in FY20 aided by higher exports.
NMDC is creating a storage yard near Jagdalpur, which will debottleneck dispatches from Chhattisgarh by 4-5 mt (to 28 mt). This will help dispatches of 35 mt even without Donimalai. KK line is being doubled in phases. The project will be fully completed during FY21. We value the stock at `111/share based on 3xEV/Ebitda for book value and for CWIP at end-FY20. Maintain ‘Buy’.
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