NMDC’s management maintained its earlier volume guidance of 30-32 million tons (+14% growth) in FY14. Growth, as per management, will be led by increase in shipments from Chhattisgarh operations to 22-23 million tonne in FY14 from 18 million tonne in FY13. Higher rake availability at 19-20 rakes/day from 17 rakes/day in Q1FY14 and 15 rakes/day in FY13 will drive increase in shipments from Chhattisgarh.
We retain ‘buy’. In our view, NMDC’s volume guidance is aggressive (our estimates are lower) since it may require 20 rakes/day in H2CY14 if it has to achieve 30 million+ tonne of sales in FY14. Rupee depreciation will help NMDC in two ways — (a) improvement in export profitability and (b) lend support to domestic prices as domestic iron ore will likely be diverted towards exports. Major miners in Orissa have already increased iron ore fines prices by R200-250/tonne.
Concerns have been expressed by the Street that NMDC’s mining may be capped at 6 million tonne. CEC’s formula of cap on mining capacity, among a host of things, is based on the formula that life of operational mine should be 20 years. Based on NMDC’s earlier resource base of 20 mt, a cap of 1 mt for Donimalai and 7.5 mt overall would have been logical.
However, aggressive exploration has led to increase in R&R to approximately 100 mt at Donimalai. NMDC has contracted 2.8 mt exports to Korea and Japan for FY14. The company can increase exports if the economics are favorable. At the current prices, NMDC will gain from exports of iron ore fines and sale of lumps in the domestic markets.
Kotak Institutional Equities