Outlook and valuation: A huge positive; maintain ‘buy’. The development removes headwinds to the stock performance.
The latest amendments made by the government in the Mineral Rules, 2015, provide a shot in the arm to NMDC. In our view, the changes have far-reaching impact as they are likely to facilitate resumption of the Donimalai mine and will set a precedence for renewal of other mines of NMDC and other PSUs. Earlier, the Karnataka High Court had struck down the state government’s demand for an 80% premium. We now believe there is little room for ambiguity on renewals going ahead. In our view, Donimalai resumption would be EPS accretive to the extent of 12-15% on an annualised basis. Maintain ‘buy’ with a TP of Rs 140 (5.4x FY21E Ebitda).
We now see light at the end of the tunnel for NMDC on the Donimalai issue after the Centre’s latest amendments. The amendment replacing the words “may, for the reasons to be recorded” by “shall, for the reasons to be recorded” in rule 3 (sub-rule 2) of Mineral Rules, 2015, makes it effectively imperative for the state government to renew the mining lease of a government company. Furthermore, in an earlier judgment, the Karnataka HC had struck down the state’s demand for an 80% premium as a pre-condition for lease renewal. Hence, we now believe that the Donimalai lease is likely to be renewed at no additional cost to NMDC; a precedence has been set for upcoming renewals; the amendment benefits all state-run mining companies such as Coal India, GMDC and MOIL.
Recovery in stock likely: The NMDC stock has under performed global iron ore players by 34% over the past 12 months, mainly due to uncertainty on Donimalai and its consequential impact on other mines coming up for renewal. We believe resumption at Donimalai would add 500kt per month in output volume and 12-15% to the EPS (annualised basis). Outlook and valuation: A huge positive; maintain ‘buy’. The development removes headwinds to the stock performance. On the operating front too, we expect normalcy to be restored at NMDC.