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Metals &amp Mining

The Supreme Court of India has partially lifted the ban on mining in the Bellary region of Karnataka. It has allowed NMDC to mine 1 million tonnes per month from its Bellary mines. However, it has ordered that no iron ore should be exported and the state government should charge a 10% royalty on market prices. The court has also sought an environmental impact assessment of the mining region. Lifting the ban is expected to increase iron ore prices in Karnataka but supply issues may remain for JSW Steel. NMDC plans to ramp up production but reaching 12 million tonnes annually may be challenging. Analysts have cut production estimates for JSW Steel for FY2012 and recommend a neutral rating until more

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124 views3 pages

Metals &amp Mining

The Supreme Court of India has partially lifted the ban on mining in the Bellary region of Karnataka. It has allowed NMDC to mine 1 million tonnes per month from its Bellary mines. However, it has ordered that no iron ore should be exported and the state government should charge a 10% royalty on market prices. The court has also sought an environmental impact assessment of the mining region. Lifting the ban is expected to increase iron ore prices in Karnataka but supply issues may remain for JSW Steel. NMDC plans to ramp up production but reaching 12 million tonnes annually may be challenging. Analysts have cut production estimates for JSW Steel for FY2012 and recommend a neutral rating until more

Uploaded by

Angel Broking
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© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Event Update | Mining

August 5, 2011

Metals & Mining


Partial lifting of ban Impact analysis
Supreme Court (SC) permits NMDC to operate in Bellary: The SC has allowed NMDC to mine 1mn tonnes per month from its mines in Bellary district, Karnataka. Further, SC has ordered that no produce should be exported by NMDC from its Bellary mines. The SC has also asked the state government to charge royalty at the rate of 10% on market price. Currently, all iron ore miners including NMDC pay royalty at the rate of 10% on prices determined by Indian Bureau of Mines. The SC has also sought for a macro-level Environment Impact Assessment of the mining region from the Indian Council of Forestry Research within three months. Iron ore prices should rise in Karnataka: The Bellary region produces approximately 28mn tonnes (~80% of iron ore production in Karnataka) of iron ore annually. Hence, despite the partial lifting of the iron ore production ban from the region, we believe iron ore prices should rise in other regions of Karnataka, thus benefitting iron ore miners. Further, we expect a slight increase in iron ore prices in other regions as well. NMDC to ramp up capacity: NMDC will re-open its Kumaraswamy mine (in addition to Donimalai mine, which was operational before the ban) and will be able to produce an additional 2mn tonnes per year for FY2012 (as per management). NMDC has been producing approximately 6mn tonnes per year from its Donimalai mines. Ramping up production from these mines to 12mn tonnes per year in the near term would be challenging for NMDC in our view. We maintain our Reduce rating on the stock with a target price of `229. JSW Steel to be worst hit: While we expect NMDC to commence supply of iron ore to JSW Steel, the latter will still remain short of its iron ore requirements to produce steel at its optimum capacity. Although there is no clarity on the time period for which the ban on private miners in Bellary will remain, we believe it will be challenging for JSW Steel to procure iron ore from other regions to feed its steel plant. Further, procuring iron from other regions will result in a sharp rise in iron ore costs on account of higher freight costs. Hence, we have cut our production estimates for JSW Steel from 7.9mn tonnes to 6.0mn tonnes for FY2012, while we keep our FY2013 estimates unchanged until further clarity. We recommend Neutral on the stock until further clarity emerges.

Bhavesh Chauhan
Tel: 022- 39357600 Ext: 6821 [email protected]

Exhibit 1: Revision of estimates


(` cr) Sales volumes (mn tonnes) Net sales EBITDA EBITDA margin (%) PBT Net income Net margin (%)
Source: Company, Angel Research

Earlier estimates Revised estimates Upgrade/(downgrade) (%) FY12E 7.9 34,145 5,937 17.4 3,094 2,109 6.2 FY12E 6.0 26,862 4,007 14.9 1,824 1,245 4.6 FY12E (24.1) (21.3) (32.5) (247)bp (41.0) (41.0) (154)bp

Please refer to important disclosures at the end of this report

Mining | Event Update

Exhibit 1: Recommendation summary


Companies SAIL Tata Steel JSW Steel Sesa Goa NMDC CMP (`) 116 533 701
249

Target Price (`) 139 799


335

Reco. Buy Buy


Buy

Mcap Upside (` cr) 47,747 51,116 15,629


21,653

P/E (x) 10.9 7.8 13.5


5.2

P/BV (x) 8.6 6.2 6.1


6.1

EV/EBITDA (x) 1.0 1.1 0.8


1.4

RoE (%) 11.2 17.2 7.7


40.7

RoCE (%) 9.2 11.8 6.8


42.9

(%) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E 20 50 27
35

1.2 1.3 0.9


1.7

7.8 6.5 7.7


0.9

6.0 5.8 4.5


2.7

12.8 18.6 15.4


25.2

10.9 13.1 13.3


30.6

- Neutral 229 Reduce

247

97,769

(7)

13.9

12.1

4.0

3.2

8.8

7.2

32.2

29.2

40.3

36.6

Source: Company, Angel Research

August 5, 2011

Mining | Event Update

Research Team Tel: 022 - 3935 7800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

JSW Steel No No No No

NMDC No No No No

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors.

Ratings (Returns) :

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

August 5, 2011

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