NMDC expects 50 million tonne mining output in FY11

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NMDC expects 50 million tonne mining output in FY11

Rana Som, Chairman and Managing Director of NMDC said the issue price band had been decided on a scientific method. However, he added that the final pricing would be decided on March 13—post final subscription. “Retail investors will get a 5% discount and 35% of the block has been allotted for them.”

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS NMDC FPO price band at Rs 300-350/sh; stk dips 6% NMDC FPO price band at Rs 300-350 per share NMDC to invest upto $3.9 bn in second steel plant Nifty BSE | NSE 01/06/12 Are Mutual Funds betting on Nifty?

The government has fixed the National Minerals Development Corporation (NMDC) follow-on public offer (FPO) price band at Rs 300 to 350 per share. This translates into a discount of 12.7% to 25.2% to the current market price. The market was expecting a mid-point or a lower price band of Rs 300. The issue opens from March 10-12.

The government will raise Rs 9,967 to 11,682.5 crore for this 8.38% stake sale and it's holding will go down to 90% from 98.4%.

Commenting on the same, Rana Som, Chairman and Managing Director of NMDC said the issue price band had been decided on a scientific method. However, he added that the final pricing would be decided on March 13-post final subscription. "Retail investors will get a 5% discount and 35% of the block has been allotted for them."

The company, in coming years, would have a diversified portfolio, including steel and other materials he said, adding, "We expect FY11 mining output at 50 million tonne."

Further commenting on the issue of iron ore prices going up, Som said the company was expecting a 40% increase in global markets due to CY09 industry dynamics which would impact the company's pricing as well. "Our domestic prices are based on global prices," he reasoned.

Here is a verbatim transcript of the exclusive interview with Rana Som on CNBC-TV18. Also watch the accompanying video.

Q: While everybody appreciates the strength of NMDC-the pricing at Rs 300 to Rs 350 places it at a significant premium to its global and local peers. Can you take us through what was the basis of the pricing and whether you could have left a bit more on the table?

A: As far as NMDC's pricing is concerned it was decided on a very fantasist method; we have taken into account not only the market price, which has been prevailing for the last 180 days or so but we have also taken the earnings before interest, taxes, depreciation and amortization (EBITDA) of the company; the projected EBITDA for 2010-11, the earnings per share and the asset value of the company, all the factors were taken together to determine a price.

I can tell you one thing that NMDC is just not comparable with many other companies which are stated to be its peers because of its extremely valuable reserves; cash reserves, lowest cost of production and of course its performance over the period of last many years as well as its plan of action for future. So I believe that the share price has been fixed at very proper way and adequate discount is now been given to the prospective shareholders.

Q: Even on enterprise value/earnings before interest, taxes, depreciation and amortization (EV/EBITDA) basis it is not that cheap between 11.5 to almost 14 times. What is it that you would hold out as growth that would be superior of your company compared to your peers? How much faster do you think you could grow in FY11?

A: In FY11 certainly the company is expecting that it would be producing more than 30 million tonne and whatever growth plan the company has advised. The mining output from its iron ore mines should obviously touch 50 million tonne.

In addition to that the company is also diversifying into steel and other minerals like coal. So taking all factors into consideration the company will no longer remain a pure iron ore mine play; it will be having a diversified portfolio and with these things being there obviously the company's potential is much higher.

Over the last ten years the company's reserves from the existing mines have been continuously expanding because of its exploration capabilities. While in many other companies the reserves are depleting with mining but in NMDC's case, the reserves are increasing with mining because of its continuous exploration.

So these are the factors which definitely have been taken into consideration. In fact I was abroad to have investors meet and road shows and I have found there has been tremendous amount of enthusiasm amongst the investors across the globe regarding NMDC's scrip.

Q: On that more than 30 million tonne volume base what kind of pricing do you expect because there has been a lot of talk that iron ore prices for NMDC might be marked up 40-50% this year. Is that a fair estimate, do you expect that bigger jump in prices?

A: Our prices are based on the global benchmark prices and this year at least 40% rise in the global benchmark prices are being talked about. We feel that that is going to be certainly happening because last year the prices had come down by 33% to 34% and thereafter the spot prices went up sharply and now the difference between the spot prices and long-term prices has been as high as about 90%. So when new long-term prices are going to be fixed, a substantial part of this gap will definitely be bridged by the revised long-term prices for the year 2010-11.

Q: We have been speaking a lot of government officials including the Disinvestment Secretary and of course interest is very high in getting NMDC done successfully. Even if you get most bids at the higher end, how open is the management and the government to pricing it at the lower end just as a gesture?

A: That would be decided only on March 13 once we get the response but we are expecting overwhelming response to this issue. In fact today also we are holding a press conference and brokers meet; last week we met lot of brokers and we find that huge excitement is there. But as far as retailers are concerned, it's a traditional book building method that retailers will get about 5% discount and so will the employees and 35% of the total block is reserved for retailers.

I hope with discounts which is available for retailers, retail market response will be very high but the question you asked regarding this, we will take a decision only on March 13.