(Vipul Sharma/Mint)
(Vipul Sharma/Mint)

NMDC: May output encouraging, but the stock overhang persists

  • Management has guided that iron ore production for FY20 will be 32-33mt; in FY19 it was 32mt, down 9% from year
  • NMDC is likely to report decent volume growth in the first quarter of FY20 despite a two-day production loss at its Bailadila (Chhattisgarh) operations in Juneago

Iron ore producer NMDC Ltd’s shares have risen 7.4% since it announced its May 2019 production and sales figures last week. Production and sales for the month increased a robust 43% and 46%, respectively, over the corresponding period last year.

That means cumulative year-on-year production and sales growth for the first two months of FY20 were 31% and 34%, respectively.

This has set a good tone for the company’s performance in the current quarter. According to Edelweiss Securities Ltd, NMDC is likely to report decent volume growth in the first quarter of FY20 despite a two-day production loss at its Bailadila (Chhattisgarh) operations in June.

It also helps that global iron ore prices are strong, which can boost the company’s export realizations.

For the NMDC stock, however, triggers for meaningful outperformance appear contained. For one, even as volumes have been encouraging so far, investors would do well to watch the progress ahead. The management has guided that iron ore production for FY20 will be in the range of 32-33 million tonnes (mt).

This excludes production from NMDC’s Donimalai iron ore mine in Karnataka, where operations have been suspended since November.

In November 2018, the Karnataka government renewed the mining lease of Donimalai on payment of 80% of revenue as lease rental. This rendered mine operations economically unviable and compelled NMDC to halt production. The company is awaiting the high court’s verdict on this matter.

Nevertheless, FY19 volumes have been severely hit due to the halt in operations at the Donimalai iron ore mine. Production in FY19 was 32mt, slipping 9% from the corresponding period the year prior. Against that backdrop, some analysts maintain that the company’s FY20 guidance, sans Donimalai, is quite impressive.

While the Donimalai issue is one to watch out for, the other is the commissioning of the company’s steel plant in Nagarnar, Chhattisgarh.

“Despite an impressive operating performance, we believe uncertainties around Donimalai restarting production and commissioning of the steel plant are likely to keep the stock’s performance subdued," pointed out Edelweiss in a report on 18 June.


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