Jitendra Kumar Gupta Moneycontrol Research
NMDC’s production continues to drop led by increasing domestic supply. If the current run rate continues, it is possible that the company might miss the annual production targets.
Between April and August this year, the miner produced close to 9.85 million tonnes of iron ore. This means, excluding the Q1FY19 production of 6.9 million tonnes, it has produced only a total of 2.95 million tonnes in July and August. Market expectation is a production of about 8-8.5 million tonnes in Q2FY19. To match these expectations, the company will need to produce about 5-5.5 million tonnes of iron ore in September alone, which looks unlikely.
This year, the market expects overall production volume growth of about 2 percent to 36.4 million tonnes. Going by the company's monthly average production run rate of 1.97 million tonnes for the first five months, it seems likely to miss the estimates.
One big reason for this is the increasing availability in the domestic market. The lifting of the bank in Karnataka has led stalled private mines becoming operational raising competition for NMDC. Companies are also increasingly using captive mines or procuring from the nearest miner to save logistics cost. The impact of this was partly seen in Q1FY19 when NMDC reported 74 percent year-on-year decline in production in Karnataka at 0.9 million tonnes.
Supportive pricing
Thankfully, the pricing environment is supportive considering the depreciation of rupee against the dollar and increase in international iron ore prices led by higher global demand.
Iron Ore inventories in the number of days of consumption at China’s major ports have dropped from 56 days in March 2018 to currently at below 42 days.
Despite the risk to production, NMDC raised its iron ore prices in August and again recently by about Rs 200 for lump and Rs 140 for the fines to Rs 3,100 a tonne. This is helping it compensate for the lower production. The international iron ore prices have increased from a monthly low of about $65 a tonne in April to about $69 a tonne now.
Outlook and valuation
In light of the volatility in production and iron ore prices, it would be worth taking a view once the Q2FY19 results are declared. This year the company is expected to report profits of about Rs 4,000 crore. Based on this, at current market capitalisation of Rs 37,400 crore its stock is trading at 9 times its expected earnings, which is reasonable particularly in the light of a dividend yield of about 4 percent.
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