Mumbai: NMDC Ltd’s loss of the Dorimalai mine in Karnataka has cast a shadow over its business model and could further hurt the stock’s valuation. NMDC shares have already lost 12.7% of their value in the past two days due to the state government’s move.

The Karnataka government’s cancellation of the mine lease to NMDC will not only reduce the mining giant’s capacity but also increase its cost of acquiring a new lease. The state government is likely to offer the mine under e-auction again, which could raise its bidding cost.

Earlier, NMDC had halted production at the mine after the state government renewed the lease with a condition of payment of 80% of the sale value as lease rental. NMDC won an appeal in the high court and the order was set aside. Production at the mine was expected to resume soon. However, the state government has once again cancelled the allotment and put up the mine for e-auction.

The Donimalai mine contributes about 6mtpa capacity or around 17% to NMDC’s total capacity. Besides, the cancellation of the lease comes at a time when iron prices have been ruling firm at about $89 per metric ton in international markets. In case NMDC rebids for the mine, it may have to cough up higher lease rental which could reduce its operating margin.

Further, the cancellation could hurt its business model as it hinges on renewal of mine leases from state governments. NMDC operates several mines in Chhattisgarh that are due for renewal in March 2020.

“An unfavourable precedence has been set for the renewal of Chhattisgarh iron ore mines. Deposits 5/10/14/14NMZ (at Chhattisgarh) with total reserves of c.989mn tons are due for renewal in Mar’20. Chhattisgarh mines currently contribute c.24mn tons of iron ore annually. The event threatens to significantly overhaul the established business model of NMDC," said analysts at JM Financial Institutional Securities Ltd in a note to clients.

NMDC has filed a revision application for Dorimalai mine, but its outcome remains to be seen. “NMDC has filed a revision application with the Ministry of Mines against the order of the State Govt. Under Section 30 of the MMDR Act, the Central Government has the power to revise the order made by the State Govt other than related to minor minerals," said analysts at Emkay Global Financial Services Ltd in a client note.

Till this is resolved, NMDC shares are likely to remain under pressure.

Close