Industry and Business

Mining is a niche and lucrative industry and requires huge investment in the initial period. This sector is mainly controlled by the government due to environmental concerns. Also, due to some policy changes, mines are allotted for captive purposes only and not for commercial use. Iron ore mining is one of them and abundantly available in India.

A continuous rise in China’s steel production in recent years has resulted in the increase in demand for iron ore from India. The share of China in iron ore exports has increased from 45% in 2001 to 75% 2005. One of the beneficiaries of this cyclical boom is Resurgere Mines and Minerals India (RMM). RMM is engaged in the business of extraction, processing and sale of mineral products like lump ore, size ore, calibrated lump ore (CLO) and iron ore fines. It holds three iron ore mines on a leased basis. The first two mines are located at Nuagaon and Maharajpur in Orissa, one at Singhbhum in Jharkhand. The company has a 60% stake in Warana Minerals, which holds a bauxite mine on a leased basis at Yelwan in Maharashtra. Two of its mines in Orissa are currently operational and are extracting iron ore, which are used as a raw material in the iron and steel industry. Its operational mines have extracted 14.2 lakh tonne (LT), 11.9 LT and 6 LT of iron ore in FY2007-08, FY06-07 and FY05-06 respectively.

Issue objective and financials

The company intends to put up about Rs 121.04 crore (upper price band) from this issue. The funds would be allocated for plant and machinery and six railway rakes. The company has invested around Rs 60 crore for plant and machinery (P&M) in FY2007-08. This P&M would be used for extraction and crushing iron ore and bauxite on its existing and new mines. One must note that RMM was outsourcing its entire mining and extraction works till the last financial year. Self-sufficiency in plant and machinery could ramp up the production of iron ore (higher crushing capacity) and reduce the operational expenditure as well.

Another advantage for RMM could be that the procurement of railway rakes would further reduce the cost due to it being a cheaper mode of transport than road. The total fund requirement is estimated at Rs 281.41 crore, which includes a term loan of Rs 86 crore and Rs 43 crore from the pre-IPO placement. Some percentage has also been allocated for working capital and contingencies purposes.

RMM, till FY2004-05, was only into trading activity of various mineral products, where margins are less. After entering manufacturing, the share of trading has gone up from 22% in FY05-06 to 30% of its total sales in FY2007-08. These traded products (only iron fines, which are a by-product of CLO) are exported to China. In FY2007-08, the rapid growth of 145% seen in sales was due to higher trading activity. Trading activity has seen a growth of 376%. One should note that similar growth may not be sustainable in the future. RMM’s sales and net profit for FY2007-08 was at Rs 403 crore and Rs 66.56 crore respectively. Being in a high margin business, the company’s operating and net profit margin stands at 25.34% and 15.67% respectively in FY2007-08.

Valuation and concerns

RMM has applied for a mining lease located at Banda in Maharashtra, which is under process and it may take time to grant rights for the extraction of iron ore. From the valuation point, its post diluted earning per share is Rs 23.32. Considering the upper price band, price to earning multiple comes to 11.66 times of the FY2007-08 earning. The issue is reasonably priced considering the risk involved in the mining business.

As RMM is into mining activities, one should look at some issues that could affect the company in the future. Non-renewal of the mining lease by the state government for Nuagoan and Jharkhand mines could freeze the mining operations and affect the business adversely. Margins could be affected if the iron ore prices cool off due to a drop in demand for steel in the domestic or international market. Any changes in the government policies with regard to iron ore mining, duties, taxes could affect the operations. Investors must consider the above factors before investing.