NMDC - Aggressive volume increase is the way forward - ICICI Securities

Seeking for allocation of new mines and to increase volumes is the way forward for NMDC. The premium on allocation of mines to state or central PSUs is the new policy normal. Under such a scenario, NMDC can benefit through aggressive scouting and acquisition of new mines within the country. NMDC, along with OMC, may be best placed to be allocated operable iron ore mines in Odisha, as the dynamics of the present auction becomes clearer to state authorities. There may not be a better time to look into the prospects of Mt. Bevan (Legacy) iron ore mines in Australia, which the company acquired in CY11 to reduce the regulatory risks arising from a single country operation. With large parts of premium risks priced in, we upgrade the stock to HOLD from REDUCE with an unchanged target price of Rs 94/share. Execution is key to set the investment thesis from here on.

- What's transpiring in Odisha auctions? ~20mnte of capacity has turned uneconomical as merchant miners have bided >100% premium to acquire those mines. While state government is following up on production guidelines and commitment, it's difficult to expect uneconomical capacities to start producing meaningfully. Also, with majority of the remaining production being concentrated with captive steel/sponge iron players, state is faced with the real possibility of slower than usual mining production ramp-up-this in turn helps in increasing costs of secondary steel producers which in-turn supports steel prices of long products.

- Win-win for Odisha and NMDC. With another 12 mines to be auctioned in near future, the scope of production disruption and the corresponding revenue loss to the state of Odisha is significantly higher. What can be achieved is quick allocation of iron ore mines in an operable condition to state/ central PSUs (i.e. OMC/NMDC). The recent 'Karnataka premium' can be imposed while allocating these mines and would ensure better revenues to the state of Odisha. It's important for NMDC too to aggressively seek out mining licenses from Odisha, because increase in mining (greenfield + brownfield) is the only way to recoup the EBITDA losses that the new 'policy' has inflicted (~ Rs 21bn in a steady state with current volumes as per our estimate).

- NMDC should also focus on diversifying single country 'policy risk'. Whileseeking to increase volumes (greenfield + brownfield), NMDC would do well to prepone commissioning of the Australian mines (Mt Bevan) which were acquired in CY11. NMDC owns ~79% in Legacy Iron Ore Australia. Legacy has 60% interest in Mt. Bevan iron ore project which has a JORC compliant, indicated and inferred resource of 1.17bnte magnetite. Drilling has progressed to target nickel and gold targets in the tenetment.

- We upgrade to HOLD from REDUCE. EBITDA impact on account of the possibility of 22.5% premium imposed across states has been factored in the CMP. Yet policy uncertainties will stay elevated in mining sector, in our view. Higher volume share remains the key monitorable.

Shares of NMDC LTD. was last trading in BSE at Rs.94.05 as compared to the previous close of Rs. 96.85. The total number of shares traded during the day was 223556 in over 1537 trades.

The stock hit an intraday high of Rs. 95.65 and intraday low of 93.4. The net turnover during the day was Rs. 21129788.

Source : Equity Bulls

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