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Iron ore prices, after seeing a low of $111 a tonne in June, have rebounded to $135 a tonne. While the start of 2013 was on a bullish note, with prices at $158-160 a tonne, the decline thereafter on the back of weak economic cues has led average prices to stay at $135 a tonne during the first 10 months of 2013.
Analysts estimate the prices will stay at current levels, which bodes well for mining companies such as NMDC and Sesa Sterlite. NMDC is also seeing volume expansion, boosting its prospects. Analyst Giriraj Daga at Nirmal Bang says “the fact that NMDC will see double-digit volume growth in FY14 makes us positive on the stock”. For Sesa Sterlite, while the company faces a mining ban in Karnataka and Goa, the resumption of mining in Karnataka will be positive. A weak rupee should also provide support to domestic realisations of both.
On NMDC, of nine analysts polled by Bloomberg in December, seven have a ‘Buy’ and two a ‘Neutral’ rating. Their consensus target price of Rs 156 for the stock, trading at Rs 139 levels, indicates an upside of about 11 per cent. For Sesa, of eight analysts polled in December, four have a ‘Buy’ and one a ‘Hold’ (remaining three ‘Sell) rating, with a consensus target price of Rs 206. However, brokerages HSBC and JPMorgan, which are more optimistic and are looking at other triggers, have a target price of Rs 240 for the stock, currently trading at Rs 201.Analysts estimate the prices will stay at current levels, which bodes well for mining companies such as NMDC and Sesa Sterlite. NMDC is also seeing volume expansion, boosting its prospects. Analyst Giriraj Daga at Nirmal Bang says “the fact that NMDC will see double-digit volume growth in FY14 makes us positive on the stock”. For Sesa Sterlite, while the company faces a mining ban in Karnataka and Goa, the resumption of mining in Karnataka will be positive. A weak rupee should also provide support to domestic realisations of both.
NMDC
With international iron ore prices rebounding, NMDC took small price rises of Rs 100 a tonne in October. It maintained prices for November but once the increases were well absorbed, it raises prices again, of fines and lumps by Rs 200 a tonne in December. The lower ore production in Karnataka and higher demand gave NMDC the confidence to do so. Positively, iron ore miners in Odisha had also raised prices after liquidation of excess inventory.
Analysts at ICICI Securities say NMDC’s average realisation of fines in Karnataka e-auctions also rose to Rs 3,258 a tonne in November from Rs 2,518 a tonne in October. Further, the latest auctions in December by Odisha Mining Corporation (OMC) fetched Rs 200-500 a tonne in premium, which should also reflect positively for NMDC. Thus, while higher prices are a positive, the increase in volumes is likely to further boost profitability.
During November, the sales volumes at 2.44 million tonnes remained robust. The cumulative volume for October and November was 4.7 mt. Thus, for the quarter ending December, analysts expect NMDC to put up a strong show in volumes.
Analysts at ICICI Securities observe the company will beat their volume estimate of 6.8 mt for the December quarter. While ICICI Securities expects the company to achieve 28 mt during FY14 (higher than the 26 mt in FY13), some others like Daga expect 30 mt, in line with the company’s earlier forecast. For FY15, the production forecast (by the firm) is 32 mt.
The company’s iron ore operations have remained suspended for a while, due to a mining ban by the Supreme Court. However, with the ban being lifted, it is likely to start mining in Karnataka, where it has six mt of capacity. Analysts expect production by end-FY14 to reach one to two mt at Sesa’s mines in the state. For Goa, the operations (around 16 mt capapcity) are expected to take more time to start. While the management hopes to clock an Ebitda (operating earnings) per tonne of $35-40 after the start of ore production in Karnataka, which will be positive for overall operating profits for the merged (Sesa Sterlite) entity, the gains could be higher if full capacity becomes operational.
Given the total capacity of 22 mt and assuming realisation of $135 a tonne, the annual revenue would work out to Rs 18,000-19,000 crore. Although this would account for 20 per cent of its annualised consolidated revenue in the September quarter (when ore business contribution was nil), given the past, record wherein Sesa has reported Ebitda margins of over 50 per cent, the contribution to profits will be much higher.
Analysts at CLSA say Sesa’s iron ore business should improve sharply over FY15-16 once the Goa ban gets lifted. They expect the ban to be lifted in FY15 itself but with a ceiling being imposed on Goa ore production. In other segments such as non-ferrous (copper, aluminium, zinc, lead and silver) and crude oil, the performance is equally important. CLSA has upgraded standalone Ebitda of the company by 13 per cent and 18 per cent for FY15 and FY16, led by higher iron ore price estimates, a 31 per cent rise in 2014 copper treatment and refining charges, and lower costs for parent Vedanta Aluminium.
