NMDC - Premium incidence impacts investment thesis - ICICI Securities

In a press conference (Link), Minister of Coal, Mines & Parliamentary Affairs, Pralhad Joshi, highlighted the arrangement that centre has reached with the state of Karnataka regarding the restarting of NMDC's Donimalai mines. The two facets of the arrangement are: i) A committee under the chairmanship of mines secretary has been formed to look into how much premium, a state or central PSU should pay on renewal of the mines - decision is expected in three months; earlier it was zero under MMDR and ii) till the time the decision is reached, based on the request of CM of Karnataka, to avoid losses to the state, an additional premium of 22.5% has been imposed on renewal of all mines (state and central PSUs). Thus, NMDC can restart Donimalai mines by starting to pay 22.5% additional premium, ad valorem premium. We downgrade NMDC to REDUCE from BUY with a revised target price of Rs94/share (earlier: Rs130/share).

- The past. Donimalai mines of NMDC came up for renewal in Nov,'18. State of Karnataka renewed the mining lease of the 7mtpa mine, conditional to additional 80% ad-valorem premium to be paid by the company. The mine has been closed since the renewal as i) NMDC opposed 80% premium, went to HC and then to the mining tribunal for relief, ii) Karnataka, cancelled the renewal and put it up for auction and finally iii) central government modified the MMDR to make it mandatory for all states to renew the state/central PSU mines without incidence of any premium. In the interim, Chhattisgarh renewed the Bailadila and the Kirandul deposits without asking for any additional premium - nevertheless demanding Rs16bn from NMDC - a follow-through to the earlier showcause sent by the state to NMDC post the Common cause judgement in Odisha. NMDC paid Rs6bn in protest, while Rs16bn was shown as contingent liability. It was expected, given the flow of events, that NMDC will eventually be allowed by the state of Karnataka to restart mining, without any premium, in Donimalai.

- The present. The current decision by the Centre allows Karnataka to levy 22.5% premium, to renew Donimalai mines as the committee comes out with a final recommendation in three months. Whatever the committee decides, will lead to a change in MMDR and will impact all state and central PSUs, as and when their mines come up for renewal. This has been done to avoid loss of revenue to the state of Karnataka.

- The probable future. We note the following: i) State demand takes precedence over MMDR and leads to imposition of interim premium and committee formation to look into imposition of additional premium permanently - this may create more uncertainty and risk aversion from investors to get interested in any form of mining entities in the near term; ii) whatever rate the committee decides upon, will also have to be observed in Chhattisgarh - mines were renewed in Oct, '19 and iii) we feel that the rate the committee decides upon will be equal to or greater than 22.5% that has been allowed mutually for Karnataka (state and centre).

- Downgrade to REDUCE. The implications of this measure more than negates whatever value upside could have come from steel plant demerger, as it impacts our FY22E EBITDA by ~Rs21bn or ~35%. We downgrade the stock to REDUCE with a revised target price of Rs94/share.

Shares of NMDC LTD. was last trading in BSE at Rs.96.95 as compared to the previous close of Rs. 107.5. The total number of shares traded during the day was 1476803 in over 13111 trades.

The stock hit an intraday high of Rs. 106 and intraday low of 96.1. The net turnover during the day was Rs. 146520209.

Source : Equity Bulls

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