NMDC May Resume Output From Donimalai Mine Soon After Favourable Court Order: Analysts

NMDC Ltd. can restart production at its Donimalai mine as the Karnataka High Court dismissed the state’s decision to claim a larger share of revenue from sale of iron ore from it, according to three brokerages.

The miner can resume operations soon as per earlier terms, IDFC Securities said in a report. While the state government has the option to appeal against the order, the brokerage thinks it’s unlikely to do so.

NMDC declined to comment on BloombergQuint’s emailed query as it hasn’t received any written order from the state government.

In November, India’s largest iron ore miner had suspended operations at its 7-million-tonne-per-annum Donimalai mine following the Karnataka government’s decision to impose 80 percent premium on sales of the key raw material for steelmaking. Lack of contribution from the mine—which according to NMDC constituted 17 percent of its total output in 2018-19—dragged down state-run miner’s production and despatches. The company, according to Bloomberg, was losing 0.5 million tonnes per month in production after the closure.

Shares of NMDC extended their gains for the third straight session on Thursday. The stock rose as much as 2.5 percent to Rs 116 apiece. Fourteen of the 18 analysts covering the stock have a ‘Buy’ rating, implying a potential upside of 15 percent. Three analysts suggest ‘Hold’, while one recommend a ‘Sell’.

Here’s what the brokerages have to say:

Motilal Oswal

• Maintains ‘Buy’ rating with a target price of Rs 138—a potential upside of 21 percent.
• Favourable judgment as directionally positive; removes key overhang on the stock.
• Iron ore sales volumes likely to increase to about 38 million tonnes in FY21 from the current estimate of 35 million tonnes.
• This would lead to a 9 percent upside to our FY21 Ebitda/PAT estimates.
• Karnataka government may contest the verdict; this may lead to possible delays in restarting operations at the mine.

IDFC Securities

• Reiterates ‘Outperform’ with a target price of Rs 168—a potential upside of 47 percent.
• Outcome of this case sets precedent for future mining lease renewals.
• Doesn’t forecast any adverse issue in the renewal of other mines for NMDC.
• Majority of NMDC’s Chhattisgarh mines are set to be renewed by March 2020.
• Expects 4.5-million-tonne volume in FY20 and 6 million tonnes from FY21 from this mine.
• Expects NMDC’s domestic iron ore prices to remain firm in FY20.

Kotak Institutional Equities

• Maintains ‘Reduce’ rating with a target price of Rs 112—a potential downside of nearly 2 percent.
• Expects to restart mine in third quarter of the ongoing financial year; raises FY20/21 EPS estimate by 14/7 percent.
• Expects Donimalai mine to restart operations post monsoon.
• Factors total 11 million tonnes sales volumes in Karnataka in FY20 versus 7 million tonnes earlier.
• Higher volumes by NMDC would depress auction premiums from second half of FY20.