Volume rebound, moderate valuation positive for mining major NMDC

Iron ore mining major NMDC’s results for the April-June quarter (Q1) of FY25 were better than estimates. Weak volumes were balanced off by higher realisations, better average selling price (ASP) and lower royalties which boosted bottomline.

The revenue was in line with estimates at Rs 5,400 crore, flat year-on-year (Y-o-Y) and down 17 per cent quarter-on-quarter (Q-o-Q). The sequential decline was primarily due to weak volumes. Iron ore production stood at 9.19 million tonnes (mt), down 14 per cent Y-o-Y and down 31 per cent Q-o-Q, while sales were 10.1mt, down 8 per cent Y-o-Y and down 20 per cent Q-o-Q. The ASP improved to Rs 5,337 per tonne, up 9 per cent Y-o-Y and up 4 per cent Q-o-Q.

The EBITDA was reported at Rs 2,300 crore up 17 per cent Y-o-Y, up 11 per cent Q-o-Q. The improvement was due to lower royalty expenses and lower operating costs. The EBITDA per tonne stood at Rs 2,324, up 28 per cent Y-o-Y and up 39 per cent Q-o-Q. The adjusted PAT was Rs 2,000 crore, up 19 per cent Y-o-Y and up 37 per cent Q-o-Q.

The management reiterated volume guidance of 50mt for FY25, despite weak volume in Q1FY25, caused by slower production in May and erratic rainfall. NMDC cut prices by a cumulative Rs 1,000 per tonne in the last few months, in tune with the market trend.

 

Royalty as a percentage of sales stood at 37 per cent in Q1 vs. 47 per cent in Q4FY4, due to weak production volume. There will be a negligible impact on NMDC as a result of retrospective royalties since as a merchant miner, the additional cost may be passed on to customers. 

NMDC currently has liabilities of Rs 144 crore from Chhattisgarh and Rs 2,500 crore from Karnataka and expects to recover these from customers. However, the company is still assessing the impact of prospective taxation. There’s an outstanding demand of Rs 21 crore from a diamond mine in Panna, Madhya Pradesh.

While revenue was in line, lower cost led to operating outperformance. There were price cuts in Q2, due to weak global prices and onset of monsoon, and this could compress EBITDA. Given that approvals are in place, production is likely to ramp up in FY25 and FY26.

All major steel manufacturers in India plan to double their capacity by FY30 given demand generated by the government's infra push, which will fuel overall demand for iron ore, a key input for making steel. The pending environmental clearances have been received.

Hence, volume growth is expected to rebound. Despite the price cuts in Q2, ASP is expected to improve in H2FY25.

NMDC spent Rs 400 crore on capex in Q1 against the annual target of Rs 2,200 crore for FY25. Rest of the capex is at tendering stage. The pellet and beneficiation plant is on hold and a redesigned plan has been initiated to ensure dual-fuel capability.

Downstream listed NMDC Steel’s monthly steel production average is 120,000 tonnes, which dropped to 80,000 tonnes in July 2024 due to scheduled maintenance shutdown.

The management guided that NMDC Steel would double its rack system to two racks and aims to reach 1.8mt of annual production. It would source about 5mt per annum of iron ore at peak utilisation and NMDC remains the preferred supplier.

Given global price trends of low ore prices, NMDC may have to take price cuts again. This could lead to earnings downgrades. But the stock is moderately valued and many analysts see an upside. According to Bloomberg seven out of 15 analysts polled in August are bullish, five have sell/reduce/underweight rating, and three are neutral. Their average one-year target price is Rs 239, compared to Tuesday’s close of Rs 224.45 on the BSE.