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MOIL Ltd
Overweight
MOIL.BO, MOIL IN
Mn ore price recovery - A near term catalyst
• Mn ore price recovery to be a near term catalyst: MOIL’s stock has
corrected 11% YTD on concerns of weak global Mn ore pricing trends. Mn ore
is a key driver for MOIL’s earnings contributing 94% of its EBITDA. With
much of the volume growth from MOIL’s capex programs likely to be back-end
weighted (we expect 5% in FY12-13E), Mn ore pricing trends remain
instrumental to earnings growth. We estimate a 1% change in Mn ore prices,
impacts MOIL’s FY12-13E EBITDA by 1.4%, which makes a key catalyst for
the stock’s performance.
• Mn ore prices at the bottom of the cycle: Sharp correction was seen in the Mn
ore spot prices (down 19% since Aug-10) before stabilizing since Nov-10 due
to increased inventory with higher supply from Mn ore miners and slowing
demand from alloy and steel sector in China in the 2HCY10 (due to power
restrictions impacting production in China). This led to a decline in MOIL’s
quarterly base prices by ~10% in the 3Q and 4Q FY11.
• Building in recovery in prices: We believe that prices could see an
improvement in the 2Q-3Q driven by 2 key reasons: a) improving demand
as steel production levels in China increase in 2011 vs. 2H2010 and b)
completion of destocking process globally by Apr, which led to weak
pricing in the later half of last year. Further, Mn ore has underferformed iron
ore prices over the last 2 quarters (+22% since Oct-10) despite similar demand
drivers, which provides positive trend for prices, in our view. Based on the 1Q
pricing, MOIL’s realization will need to improve 10% every quarter for the
remaining of FY12E to maintain our estimates.
• Mix shift to help realizations: YTD trend in spot Mn ore prices and recent
newsflow on BHP price reduction for March led to the 6-7% decline in 1QFY12
base prices for MOIL. However, much of the weakness in base prices in
1QFY12 would likely be offset by benefits from mix shift from fines to SiMn
grade ore (47-100% premium to fines). In our view, blended realization for
MOIL is likely to remain nearly flat q/q in 1QFY12E.
• Remain OW: Our Mar-12 PT of Rs490 (implying 22% upside from current
levels) is based on 6x FY12E EV/EBITDA. This represents a 20% premium to
the global mining peers (those with Mn ore exposure) given its low cost of
production, robust balance sheet and domestic market focus. Key downside risks
to our rating are slowdown in China steel demand and subsequent impact on Mn
ore prices and potential changes in the mining law in India.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MOIL Ltd
Overweight
MOIL.BO, MOIL IN
Mn ore price recovery - A near term catalyst
• Mn ore price recovery to be a near term catalyst: MOIL’s stock has
corrected 11% YTD on concerns of weak global Mn ore pricing trends. Mn ore
is a key driver for MOIL’s earnings contributing 94% of its EBITDA. With
much of the volume growth from MOIL’s capex programs likely to be back-end
weighted (we expect 5% in FY12-13E), Mn ore pricing trends remain
instrumental to earnings growth. We estimate a 1% change in Mn ore prices,
impacts MOIL’s FY12-13E EBITDA by 1.4%, which makes a key catalyst for
the stock’s performance.
• Mn ore prices at the bottom of the cycle: Sharp correction was seen in the Mn
ore spot prices (down 19% since Aug-10) before stabilizing since Nov-10 due
to increased inventory with higher supply from Mn ore miners and slowing
demand from alloy and steel sector in China in the 2HCY10 (due to power
restrictions impacting production in China). This led to a decline in MOIL’s
quarterly base prices by ~10% in the 3Q and 4Q FY11.
improvement in the 2Q-3Q driven by 2 key reasons: a) improving demand
as steel production levels in China increase in 2011 vs. 2H2010 and b)
completion of destocking process globally by Apr, which led to weak
pricing in the later half of last year. Further, Mn ore has underferformed iron
ore prices over the last 2 quarters (+22% since Oct-10) despite similar demand
drivers, which provides positive trend for prices, in our view. Based on the 1Q
pricing, MOIL’s realization will need to improve 10% every quarter for the
remaining of FY12E to maintain our estimates.
• Mix shift to help realizations: YTD trend in spot Mn ore prices and recent
newsflow on BHP price reduction for March led to the 6-7% decline in 1QFY12
base prices for MOIL. However, much of the weakness in base prices in
1QFY12 would likely be offset by benefits from mix shift from fines to SiMn
grade ore (47-100% premium to fines). In our view, blended realization for
MOIL is likely to remain nearly flat q/q in 1QFY12E.
• Remain OW: Our Mar-12 PT of Rs490 (implying 22% upside from current
levels) is based on 6x FY12E EV/EBITDA. This represents a 20% premium to
the global mining peers (those with Mn ore exposure) given its low cost of
production, robust balance sheet and domestic market focus. Key downside risks
to our rating are slowdown in China steel demand and subsequent impact on Mn
ore prices and potential changes in the mining law in India.
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