There is not much for investors to do in NMDC Ltd stock. Its shares have gained nearly 39% in 2023 so far. Investors are happy with the state-owned iron ore producer’s steady progress towards its FY24 volume target. NMDC aims to clock a volume in the range of 47-49 million tonnes this fiscal year. In the first seven months of FY24, volume was 23.5 million tonnes, up 19% year-on-year. This means that the demand is now lower. To reach the midpoint of its guidance range, NMDC needs to record lower growth of nearly 14% in the remaining months.
In addition, a few factors would support the growth. The Bacheli plant in Chhattisgarh and the Kumaraswamy mines are expected to start production soon and should add about 4.3 million tonnes per annum of capacity. In addition, NMDC has started supplying iron ore to NMDC Steel Ltd, which is now operating at 40-45% capacity. This is expected to increase to 70% by the end of this fiscal year and increase the size of the NMDC.
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Additionally, NMDC iron ore prices may see a rise. In the September quarter (Q2FY24) earnings call, the company said it will take a price revision call in the coming days. The last increase was taken in October and the price of the lump sum and fines now stands ₹5,200 and ₹4,460 per tonne, respectively. Currently, the share of fines sales stood at 70% and this is expected to increase further in the coming quarters supported by healthy demand.
Overall, the strength in the world iron ore price rises well. For perspective, the price of Chinese iron ore fines in November rose nearly 8% month-on-month to $128 per tonne, according to SteelMint.
Having said that, one should be wary of the weakness in the price of steel as iron ore is a key raw material used in the production of steel. Domestic hot rolled coil prices fell by 4% in November to ₹55,450 per ton.
“Going forward we expect NMDC to absorb price increases and volume growth should continue in excess of 15% in the second half of FY24. We maintain our volume estimate of 46/50 million tonnes for FY24/FY25 while raising FY25 iron ore realization from ₹4,350 per ton to ₹4,512 per tonne,” analysts at Prabhudas Lilladher said in a November 18 report.
To be sure, in Q2, NMDC’s compounded realization declined by almost 15% sequentially. ₹4,194 per ton. This comes after growth in the metric for two straight quarters. An adverse mix played destructive sport with Karnataka playing 37% of the volume in Q2 against 30% in Q1. Note that Karnataka has lower quality iron ore and hence lower realization against Chhattisgarh. Although royalty costs were lower, rising employee and other costs meant a 31% drop in Ebitda per tonne. Ebitda is earnings before interest, tax, depreciation and amortization, a measure of profitability.
Meanwhile, NMDC estimates that the capital expenditure (capex) in FY24 will be in range ₹1,800-2,000 crore, which is higher than the initial target. In the first half of FY24, the miner incurred ₹1,000 crore capex. In addition, in FY25 it aims to capex of ₹2,200-2,300 crore. Such projects would enhance the company’s evacuation capacity and brighten its immediate growth prospects helping it achieve a capacity of 100 million tonnes per annum by FY30.
So far, investors in NMDC shares have been taking the optimism seriously, limiting meaningful gains. Additionally, Kotak Institutional Equities sees structural headwinds in the domestic iron ore market for merchant miners due to increased iron ore integration of the steel majors.
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