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The Supreme Court on Friday allowed only NMDC to mine iron ore at an expanded output of
12mt. Other miners will have to wait till environmental reports are submitted. Meanwhile, JSW
Steel would have only a marginal respite
NMDC emerges stronger. Earnings could rise by 8.6/7% for FY12F/13F
The Supreme Court has allowed only NMDC to re-start mining activities with immediateeffect.
It has also asked NMDC to raise its output to 12mnt from current levels of 5.5mnt and
to supply all the output in the domestic markets in consultation with the Ministry of Steel.
NMDC contributed about 20% of Bellary district's iron ore output. NMDC has been currently
been operating only the Donimalai mines in Bellary which have an output of 5.5mnt. The
Kumarswamy deposit is currently under development phase and could take a few months to
raise output to rated capacity of 7mnt. NMDC's total JORC compliant proved reserves in
Bellary were at 153mnt as on March 2009. The current realizations for fines is at Rs2,900/t
and Rs4.400/t for lumps.
NMDC reported an average ebitda of US$72/t in 1QFY12. We believe the Supreme Court
would allow for fast-tracking of output at the Kumaraswamy and it is likely that NMDC would
be able to produce 2mnt and 5mnt of output from this deposit in FY12/13 compared to our
current estimates of nil and 3mnt of volumes for FY12/13. Also, we expect that the existing
Donimalai mine also to ramp-up output by 1mnt FY12 and FY13. The increase in output in the
Karnataka Group of mines of NMDC could result in an increase of 8.6%/7% for our earnings
estimates for FY12/13.
JSW Steel would still face pressure
We estimate that JSW Steel's options for procuring ore from Karnataka are very limited. 50%
of NMDC's current iron ore output of 5.5mnt in Karnataka is bought by JSW Steel. Even if we
assume that all of the output from Chitradurga and Tumkur districts of 8mnt and 3mnt are
diverted to JSW Steel, it would add to just 12-13mnt as against a requirement of 17-18mnt of
iron ore. This would mean that JSW Steel would have to aggressively pursue procurement of
iron ore from states like Chhattisgarh and Orissa.
NMDC has already started supplying iron ore fines to JSW Steel from its idle stocks in
Bailadila, Chhattisgarh. The cost of transportation from Chhattisgarh to JSW Steel's plants is
about Rs1,200/t.
New method of royalty calculation
The Supreme Court has asked the Karnataka State to levy a royalty of 10% of selling price as
against the current practice of levying 10% of royalty on the ex-mine iron ore prices published
by the Indian Bureau of Mines (IBM). The difference in the royalty so collected has to spent
specifically for rehabilitation. The current IBM rates for iron ore having Fe between 62-65% in
Karnataka is Rs1,983/t and Rs2,488/t. This would mean that the royalty costs for steel
producers would rise by 46% for fines and 77% for lumps.
The Supreme Court has also asked the Ministry of Environment and Forest to undertake and
environment impact assessment study for the Bellary district and submit a report within 3
months. It has also asked the Karnataka State to a reclamation and rehabilitation plan of the
Bellary district within 3 months.
What is pertinent to note that the Supreme Court has not allowed any other mine to resume
operations. This leaves 80% of Bellary's iron ore output of 26mnt out of production and out of
markets. This unique case highlights negative externalities arising out of a few miners
indulging in illegal mining and is being borne in the form of increased iron ore and
transportation costs for the entire steel industry as a whole.
We have BUY rating on NMDC with a TP of Rs298. We have a BUY on JSW Steel with a TP
of Rs750.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The Supreme Court on Friday allowed only NMDC to mine iron ore at an expanded output of
12mt. Other miners will have to wait till environmental reports are submitted. Meanwhile, JSW
Steel would have only a marginal respite
NMDC emerges stronger. Earnings could rise by 8.6/7% for FY12F/13F
The Supreme Court has allowed only NMDC to re-start mining activities with immediateeffect.
It has also asked NMDC to raise its output to 12mnt from current levels of 5.5mnt and
to supply all the output in the domestic markets in consultation with the Ministry of Steel.
NMDC contributed about 20% of Bellary district's iron ore output. NMDC has been currently
been operating only the Donimalai mines in Bellary which have an output of 5.5mnt. The
Kumarswamy deposit is currently under development phase and could take a few months to
raise output to rated capacity of 7mnt. NMDC's total JORC compliant proved reserves in
Bellary were at 153mnt as on March 2009. The current realizations for fines is at Rs2,900/t
and Rs4.400/t for lumps.
NMDC reported an average ebitda of US$72/t in 1QFY12. We believe the Supreme Court
would allow for fast-tracking of output at the Kumaraswamy and it is likely that NMDC would
be able to produce 2mnt and 5mnt of output from this deposit in FY12/13 compared to our
current estimates of nil and 3mnt of volumes for FY12/13. Also, we expect that the existing
Donimalai mine also to ramp-up output by 1mnt FY12 and FY13. The increase in output in the
Karnataka Group of mines of NMDC could result in an increase of 8.6%/7% for our earnings
estimates for FY12/13.
JSW Steel would still face pressure
We estimate that JSW Steel's options for procuring ore from Karnataka are very limited. 50%
of NMDC's current iron ore output of 5.5mnt in Karnataka is bought by JSW Steel. Even if we
assume that all of the output from Chitradurga and Tumkur districts of 8mnt and 3mnt are
diverted to JSW Steel, it would add to just 12-13mnt as against a requirement of 17-18mnt of
iron ore. This would mean that JSW Steel would have to aggressively pursue procurement of
iron ore from states like Chhattisgarh and Orissa.
NMDC has already started supplying iron ore fines to JSW Steel from its idle stocks in
Bailadila, Chhattisgarh. The cost of transportation from Chhattisgarh to JSW Steel's plants is
about Rs1,200/t.
New method of royalty calculation
The Supreme Court has asked the Karnataka State to levy a royalty of 10% of selling price as
against the current practice of levying 10% of royalty on the ex-mine iron ore prices published
by the Indian Bureau of Mines (IBM). The difference in the royalty so collected has to spent
specifically for rehabilitation. The current IBM rates for iron ore having Fe between 62-65% in
Karnataka is Rs1,983/t and Rs2,488/t. This would mean that the royalty costs for steel
producers would rise by 46% for fines and 77% for lumps.
The Supreme Court has also asked the Ministry of Environment and Forest to undertake and
environment impact assessment study for the Bellary district and submit a report within 3
months. It has also asked the Karnataka State to a reclamation and rehabilitation plan of the
Bellary district within 3 months.
What is pertinent to note that the Supreme Court has not allowed any other mine to resume
operations. This leaves 80% of Bellary's iron ore output of 26mnt out of production and out of
markets. This unique case highlights negative externalities arising out of a few miners
indulging in illegal mining and is being borne in the form of increased iron ore and
transportation costs for the entire steel industry as a whole.
We have BUY rating on NMDC with a TP of Rs298. We have a BUY on JSW Steel with a TP
of Rs750.
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