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Indian Metals & Ferro Alloys (IMFA IN) Rating:Not rated
Highlights of 2Q FY11 conference call
What has changed?
• We attended Indian Metals & Ferro Alloys’s (IMFA) conference call. The
company has received stage-1 forest clearance for its captive thermal coal mine
and says it is on track to commission its 120MW power plant by 1Q12.
Impact
• IMFA has signed a joint venture with POSCO (005490 KS, W467,000, 2) in
which IMFA will divest a 30MVA ferro-chrome furnace in the joint venture
and POSCO will invest US$5m for a 24% stake in the joint venture. IMFA will
retain the balance of 76%.
• The company believes the joint venture is likely to produce around 35-36,000 t.p.a.
of ferro chrome, all of which would be sold to POSCO at a 3% discount to
quarterly contract prices. This deal guarantees ferro-chrome sales of 35,000 t.p.a.
over the next 25 years for IMFA.
• IMFA has also signed a long-term offtake arrangement for an additional 50,000
t.p.a. of ferro chrome with POSCO at contract prices, which are decided now on
a quarterly basis in the international market.
• IMFA’s management plans to expand its power portfolio from 258MW
currently (108MW operational, 30MW in the final stages of completion and
120MW under construction) by adding 660MW of one unit of a super-critical
thermal power plant. However, this plan is still at the drawing-board stage.
Management expects the 30MW plant to be operational by January 2011.
• IMFA has been allocated already a thermal coal mine with proven reserves and
resources of 196m tonnes. However, the current extractable resources are 130m
tonnes, according to the company. IMFA expects this to increase substantially
when it starts exploring the coal mine after receiving all the clearances from the
government. It has already received stage-I forest clearance from the Central
Government in October 2010, which is one of the most crucial approvals
needed to start mining.
• IMFA said it will develop the mine via a joint venture, in which it will hold a
74% stake and the promoters will hold the balance. Management has guided
that it will probably start mining by July 2011. However, IMFA said that coal
mined by the joint venture will not be sold to the company on a cost basis by
the joint venture, but will be sold either on a cost-plus basis or at preferential
prices compared with coal bought by the company currently in the domestic
market.
Valuation
• The stock is currently trading at a PER of 8.0x, based on FY12 Bloombergconsensus
estimates.
Catalysts and action
• Catalysts would be ferro chrome prices, the commissioning of the 120MW
power plant, and the start of coal mining, according to the company.
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