Resurgere is sitting pretty on the back of robust demand and high prices, but it should have left a little more on the table for investors.
To take advantage of the demand for iron ore, Resurgere Mines & Minerals India, which is engaged in extraction and processing of iron ore, is investing Rs 244.8 crore towards mining plant and machinery facilities, and logistics infrastructure.
The company believes that domestic demand for iron ore, which was pegged at 98 million tonnes in 2007, is expected to touch 130 million by 2011 on the back of rapid infrastructure development in the country and demand from iron and steel manufacturers.
Hitherto, due to scale limitations the company was outsourcing its plant and machinery requirements but with four mines and a possibility of getting a lease on the fifth, the company has decided to buy its own extraction and processing equipment.
To part fund this expansion and working capital margin and corporate expenses of Rs 28 crore, the company is planning to raise about Rs 121 crore from its public issue. It has already raised Rs 143 crore through term loans, preferential allotments and a pre-IPO placement over the last one year.
Operations and expansion
Resurgere has two mines in Orissa (Nuagaon, Maharajpur), one each in Jharkhand (Tatiba) and Maharashtra (Yelwan), with combined reserves of 74.8 million tonnes of iron ore and 4.92 million tonnes of bauxite.
While the iron ore mines are operational, where lump/size ore and calibrated lump ore (CLO) mined, the company plans to start processing bauxite ore at the Maharashtra site in October this year.
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The company is also expecting to bag lease rights for iron ore mines in Banda, Maharashtra in this fiscal. While the acquisition of excavation and processing equipment will cost Rs 128.56 crore, the purchase of six railway rakes will mean an expenditure of Rs 116.36 crore.
The company believes that the new (self owned) equipment will increase efficiency as production capacity increases from 100-400 tonnes per hour (tph) from outsourced suppliers to 400-800 tonnes per hour based on grade of the ore.
Exports
The company is planning to use rakes to transport iron ore fines, a CLO byproduct, to cater to the Chinese market, which is the world’s largest user of iron ore at 36 per cent of total global iron ore production.
While its principal products such as lump/size ore and CLO are sold on an ex-mines basis within the country, fines are exported as small and medium-sized steel manufacturers do not have pelletisation or sintering capacity. The high cost of transportation from its mines by road had made exports unviable.
The outlay for logistics infrastructure will ensure that the company gets four rakes per month from the Indian Railways with a rebate of 10 per cent for every rake that is provided by the company to railways under the Wagon Investment Scheme.
While the Haldia and Paradip ports will be used for export of fines from Nuagaon, Maharajpur and Jharkhand mines, the Reddy port of Goa will be used for transport of iron ore. Fines contributed to nearly 30 per cent of the net revenues at Rs 120 crore, largely from trading as the company sourced them from iron ore mines in Madhya Pradesh and exported them to China from the Vizag port.
With the cost of freight per tonne to China from Brazil ($80) and South Africa ($55) higher than that of India ($40) and only Australia ($30) having the pricing advantage, the exports focus should help the company improve its realisation.
Valuations
Resurgere has many advantages due to its location (proximity to ports, steel makers), grade of ore (62-64 per cent iron content), reserves (74 million tonnes) and good margins (Ebidta at 25.65 per cent) due to high demand.
With 98 per cent of iron ore used by the iron and steel manufacturers, and with steel production expected to touch 80 million tonnes in FY12 from 55 million tonnes now, (9.2 per cent CAGR) demand for iron ore should not be a problem.
With the company is planning to focus more on the manufacturing of CLO, average realisation should improve from Rs 1,847 per tonne in FY08. While CLO contributed 56 per cent to net revenues, lump/size ore and fines contributed 14 per cent and 30 per cent, respectively.
With the current rate of CLO at around Rs 3,000 per tonne and its extraction cost expected to drop by Rs 300 per tonne from Rs 1,500 per tonne in FY08 due to the use of its own equipment, Ebidta margins are expected to improve going forward. Ebdita margins were down in FY08 as compared to FY07 due to high proportion of low margin (5-6 per cent) fines in the turnover.
| MINING WEALTH | ||||
| Rs crore | FY07 | FY08 | FY09E | FY10E |
| Iron ore production^ | 1.19 | 1.45 | 3.25 | 5.00 |
| Average realisation* | 1,339.00 | 1,847.00 | - | - |
| Extraction cost* | - | 1,500.00 | 1,200.00 | 1,200.00 |
| Net sales | 164.24 | 403.00 | 812.50 | 1,250.00 |
| EBIDTA | 51.10 | 107.60 | 239.69 | 387.50 |
| EBIDTA margin (%) | 29.69 | 25.65 | 29.50 | 31.00 |
| Net profit | 31.63 | 64.36 | 121.06 | 212.50 |
| NPM (%) | 19.26 | 15.97 | 14.90 | 17.00 |
| EPS (Rs) | 21.86 | 32.05 | 42.42 | 74.46 |
| P/E (x) at Rs 272 | 12.44 | 8.49 | 6.41 | 3.65 |
| Rs 263 | 12.03 | 8.21 | 6.20 | 3.53 |
| mn=million E: Estimates *(Rs/tonne) ^(mn tonnes) | ||||
At the upper and lower end of the price band of Rs 272 and Rs 263, the stock discounts its FY10 estimated EPS of Rs 74.4 by 3.65 and 3.53 times, respectively.
While the prospects of the company are good due to high spot prices of iron ore and robust iron and steel demand, the pricing for a commodity business is stiff considering that a much larger diversified rival such as Sesa Goa trades at 4 times its estimated FY10 earnings.
Issue opens: August 11
Issue closes: August 13