Stock Review: Resurgere Mines

 

Debt-Equity Ratio, At Around 0.3, Gives Room For Expansion

   THE stock of Resurgere Mines and Minerals has seen high volatility recently. It touched a high of Rs 140 on July 27 and fell back to its initial levels of around Rs 75 on Tuesday. The company has reported a triple-digit profit growth in the past three consecutive quarters. Going ahead, the company is poised to benefit from recent increase in iron ore prices and higher production from its iron ore mines.

   Resurgere Mines and Minerals is a Mumbaibased company engaged in processing and sale of minerals with exploration and development of mining asset capabilities. The company, at present, operates two iron ore mines in Orissa, one bauxite mine in Maharastra and one soapstone mine in Rajasthan.

   The total iron ore reserve of the company currently stands at 114 million tonnes. Apart from this, the company is also in the advanced stage of negotiations for four leases, of an area of 1,000 acres, with reserves of 100 million tonnes on the west coast of India. The company can leverage all these mining assets to fulfil growing demand from steel manufacturers. It intends to integrate forward by setting up a steel plant. This may offer some hedge against fluctuation in iron ore prices.

   The company recently raised around $53.75 (Rs 252.6 crore) million through the issue of global depository receipts (GDR). The GDR is listed on Luxembourg Stock Exchange. Money raised by this GDR will be used to fund its pelletisation plant and to acquire new mining assets, both nationally and internationally.

   On the financial front, though sales and profit growth is strong, the company has not been able to generate operating cash flows. This is a typical situation in the case of new mining and steel companies since they have a long cash conversion cycle, which is time taken to convert finished goods into cash. The company has a receivable period of 88 days, which is very high compared to the industry average of 50 days.

   On the positive side, it has a debt-equity ratio (D/E) of around 0.3, which leaves future scope for further debt raising to fund expansion plans. The company doesn't undertake any long-term sales. It operates in the spot market, given higher profit margins. Going ahead, the company expects to double its net margin in the current fiscal from the current 6%.

   At the current market price of Rs 80, the stock is trading at 13.5 times its trailing 12-month earnings. This is at a significant discount to some of its mining peers, which are trading at a P/E of above 20. The company's price to book value stands at 1.2, much lower than that of companies like Sesa Goa and NMDC.