NMDC is likely to benefit from sustained high domestic iron ore prices as a supply deficit is likely to remain until FY23
Shares of NMDC Ltd have risen over 30% since February. As it turns out, the company has kept investors’ faith by reporting strong growth both in production and sales performance for the month of February 2021.
Iron-ore sales and production rose 12% and 19%, respectively, last month. While iron-ore demand remains strong, supplies are limited. The Odisha iron-ore mines auctioned last March are yet to reach optimum production levels.
Notably, NMDC has recently restarted operations at the Donimalai mines in Karnataka. The mines have a capacity to produce a minimum of 0.5 million tonnes (mt) of iron ore per month. The contributions from Donimalai mines and capacity ramp-up in the Chhattisgarh and Karnataka mines can help drive volumes growth. For now, the supply shortage is helping lift realizations.
International iron-ore prices have been firm, with rates almost double compared to what they were at this time last year.
NMDC’s selling prices for its produce at ₹4,210-5,110 a tonne for fines and lumps, respectively, are substantially higher than ₹3,160-3,450 a tonne at the start of October. Analysts say realizations can sustain at current levels and perhaps even improve, given the firm international prices and limited iron-ore availability in the country.
NMDC is, thus, in a sweet spot and is expected to benefit from sustained high domestic iron ore prices as a supply deficit in the domestic market is likely to remain until FY2023, say analysts at Sharekhan.
The ramp-up of production at the Odisha mines may take time, and they expect NMDC’s iron ore sales volume to grow strongly by 30%/7% y-o-y to 43mt/46mt in FY22/FY23, respectively.
On realizations, high China-demand and lower production guidance by Vale SA (key iron-ore producer in Brazil) is likely to keep international iron-ore prices firm during FY2022-FY2023, point out analysts.
As the outlook on volumes and realizations remains strong, states are contemplating levying an additional premium on NMDC’s renewed mining leases, which is a concern. Analysts at Credit Suisse believe higher volumes in the years to come will cushion the impact of royalty rates to an extent. Visibility on demerger of the company’s steel plant has also improved, which may unlock value for investors.