Rising output and steady prices, with chances of a further increase, are music to a mining company’s shareholders. NMDC Ltd’s investors should like what they see.
In July, the company’s iron ore output was up by 25.6% over a year ago while sales increased by 16%. Sequentially too, output increased. In the June quarter, NMDC had reported a sequential increase in its exports while sales to domestic customers had declined.
The second push is from the international market, where iron ore prices have recovered smartly. Iron ore prices are up over 8% compared to 1 August and by around 24% over early July, of imported ore at China’s Qingdao port, according to Bloomberg data.
NMDC had dropped its iron ore prices during the first quarter. Market conditions are supporting the case for an increase, and steel prices have been rising as well. NMDC’s prices have not changed so far, however, and it may only do so with a lag. While it may wait for the trend to settle before it changes prices, it may also have to take cognizance of the government’s desire to keep domestic iron ore prices down.
While rising steel prices are seen as a good thing, as that improves the prospects of debt-laden steel companies, a hike in iron ore prices is not viewed favourably. An increase in the cost of iron ore is seen as hurting steel cash flows and their debt-repaying capacity.
On the brighter side, the current international rally in ore prices is seen as having strong legs, which means eventually NMDC should be able to increase prices. After all, a mining company endures low prices when the cycle turns against it, waiting to increase prices when the cycle turns in its favour.
In the June quarter, NMDC’s domestic prices rose by an average of 6% but prices in the current quarter are down by 8-9% sequentially over the closing price of the first quarter. Still, the increase in output should see sales increase, and profit may increase too, although profitability is likely to come under some pressure.
NMDC’s shares have risen quite a bit since early July. While they declined in the first half of August, they have recovered since then. The company’s output numbers support prospects for a good performance in the rest of the fiscal year. But if the trend in international iron ore prices does not translate to a jump in NMDC’s prices, investors may get disenchanted.