High realisations to improve NMDC outlook; iron ore volumes to grow 5-6%

Mining major NMDC's stock, which had been on a downtrend owing to weak iron prices since the beginning of the year, has bounced back in August with gains of about 30 per cent. 

The reason is a rebound in international iron-ore prices, strong demand outlook led by rising steel production, and expectations of more price hikes. Iron-ore production, which remained subdued in the monsoon season, is now expected to pick up as well. Better realisations and volumes should help support stock prices.

The 62 per cent Fe grade iron-ore prices ex-China that stood at more than $78 a tonne in early March had corrected sharply to less than $64 a tonne in April, and had remained range-bound till July. This had prompted the NMDC to adjust its pricing. However, prices have gained to more than $68-a-tonne levels now. The rising pellet prices on the back of strong demand from China, and worldwide supply constraints is supporting realisations. NMDC, a few days ago, has taken a price hike of Rs 200/tonne for iron ore lumps and Rs 150/tonne for iron ore fines. 

Since July 2018, prices of NMDC's iron ore lumps have increased by Rs 500 a tonne, while prices of fines have increased by Rs 450 a tonne. As Odisha-based iron ore miners contemplate further hike after having raised prices by Rs 600-700 a tonne in two tranches in August, there is more room for price increases by the NMDC, observe analysts. After the recent hikes, analysts at ICICI Securities have already revised upwards their iron ore realisation estimates for both 2018-19 and 2019-20 on the back of higher domestic iron ore prices. Analysts believe that with better realisations witnessed in September, the company should be able to report higher margins in the September quarter. The sharp increase in pellet prices also augurs well for the company's recently commissioned pellet plant, which is expected to produce 0.4-0.5 million tonnes in 2018-19. Analysts are expecting Rs 1,500-2,000 per tonne boost to profitability. Analysts at Motilal Oswal Securities have projected NMDC's iron ore volumes to grow 5-6 per cent, annually, over the next four-five years with operating profit growth of 13 per cent annually over FY18-22.