Investors ignore NMDC’s price cuts, and worry about its Donimalai iron ore mine instead
The price cut was probably on expected lines, and also translate into a small reversal of price hikes taken by the company over the course of this fiscal year
Iron ore producer NMDC Ltd has cut prices effective 1 December. This should offer some fillip to its volumes. But investors barely blinked when this was announced on 3 December after market hours. That’s probably because the price cut was on expected lines. Further, these price cuts also translate into a small reversal of price hikes taken by the company over the course of this fiscal year. Therefore, the impact may not be very significant.
What is more consequential and worrisome from an investor’s perspective is the fate of the company’s Donimalai iron ore mine in Karnataka. In early November, the Karnataka state government approved the mining lease of Donimalai on payment of 80% of revenues as lease rental. This made the operations of the mine economically unviable and forced the company to halt production.
As a result, NMDC’s volume outlook for the second half of FY19 is under threat.
Even as the matter is pending resolution, “if the production halt persists, we see financial year 2020 earnings per share impact of 15-17%,” pointed out analysts from Edelweiss Securities Ltd in a report.
Iron ore imports in November spiked 63% year-on-year (8% month-on-month) to 1.11 million tonnes in the wake of the production halt at Donimalai, added the analysts.
That’s not all. According to Icra Ltd, the suspension of operations at the Donimalai mine is expected to result in higher ore prices in Karnataka, resulting in a cost-push for steel mills in the state.
Needless to say, investors would do well to stay tuned to how the Donimalai story unfolds. Another factor they should watch out for is the commissioning of the company’s 3 million tonnes per annum steel plant, which is expected in June 2019.
NMDC has put up a miserable show so far in FY19, underperforming the Nifty 500 index by a wide margin.
The stock is getting derated due to uncertainties around longevity of mining profit and delays in commissioning of the steel plant, wrote analysts from Motilal Oswal Securities Ltd wrote in a report on 6 December.
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