The size of NMDC Ltd’s acquisition may seem unimpressive, paying Australian $19 million (Rs95 crore) for a 50% stake in Legacy Iron Ore Ltd, when it has Rs17,000 crore sloshing around in its bank account.
The significance of this acquisition is that it’s the state-owned miner’s first overseas acquisition. Keeping it small also makes it easier to close the deal for a state-owned company, rather than a high-profile billion-dollar acquisition, which will invite greater scrutiny and delays.
A statement from Legacy says that NMDC found in it an ideal entry point for the Australian market. The current fund infusion is the beginning and Legacy may also acquire new mineral projects, helped by NMDC’s presence and financial muscle.
Legacy’s current projects are at the initial stages and the most important one, the Mt Bevan iron ore project, will reach only the pre-feasibility stage after Legacy spends A$3.5 million to get a 60% participating interest. Thus, it is likely to be years before investors can start factoring this acquisition in NMDC’s valuation.
The situation could change if Legacy acquires some operational mining assets. Thus, NMDC’s existing operations will continue to drive its performance and valuation. Iron ore companies are benefiting from rising international ore prices, chiefly because of China’s sustained growth in steel production.
But domestic ore output has been hit by a ban on mining in Karnataka’s three iron ore-rich districts. NMDC is in the privileged position of being the only unit allowed to mine in the state, putting it on a better footing compared with other miners.
It should thus outperform them; whether it does will become evident in its September quarter results. The company’s share price has risen by 16% in about a month as a result, but fell on Thursday by 5.6%, which may have less to do with the acquisition and more with the broad fall in equities.