Stock Review: Sandur Manganese

 

 

This is a mining company, which is involved in the mining of manganese ore and iron ore. Mining companies of late, especially from Karnataka, have been in focus thanks to Reddy brothers for all the wrong reasons. I think this provides an opportunity for the long term investor to buy Sandur Manganese at lower levels. Till 2008, this company was mining about 700 hectares where the results were about 5 million tonne of iron ore and 18 million tonne of manganese ore. Thereafter, the company got clearance to develop further and as on today the total area being mined is about 2,000 hectares up from 700 hectares. The total reserves of iron ore are 50 million tonne and manganese ore is 25 million tonne.

If you see the valuation of the company, the marketcap at the current price of about Rs 600 is about Rs 525 crore. It is a debt-free company. The company had got cash of close to Rs 125 crore. Assuming Sundry Debtors, Sundry Creditors and other things you have a company with enterprise value of about Rs 450 crore. The company made and operating profit of Rs 235 crore in FY09, which was considered as a very good year for iron ore and manganese ore mining companies. So you have a business, which is available at roughly two-years of its operating profit. These mines can give you revenues for few decades, so you have a business, which is available at only two good years for the industry.

If you see the valuation of the company at the bottom prices of manganese ore and iron ore—the bottom prices which these commodities touched in the last two years—you get a valuation of Rs 15,000 crore and at the current price the valuation is close to Rs 20,000 crore. Even if you try to be very conservative you have a business, which is available only at an enterprise value of Rs 450 crore where the valuation of reserves could be more than Rs 15,000 crore.

The promoters are holding close to 75% in the company which is a big positive as far as I am concerned. The company has got a 74% subsidiary called Star Metallics. This Star Metallics is into ferro alloys. The company has invested close to Rs 110 crore in Star Metallics and the investment has still not started yielding returns because Star Metallics plant is not operational.

The company's captive power plant of 32 megawatt is going operational in September of 2010, which will make Star Metallics' ferro alloy plant operational. Which means that the investment of Rs 110 crore with the company made in Star Metallics will also start yielding returns from next month onwards. You have a mining company, which is available at extremely reasonable valuations. There are short-term concerns regarding mining restrictions being imposed by the Karnataka government and also regarding restrictions on movement of iron ore.

But I think these provide an opportunity to the long-term investor to buy the stock at lower levels. For the first quarter, the company made a profit of Rs 28. Rs 32 is the EPS for the first quarter. Now, assuming that the next three quarters are muted and they are not good as the first quarter on a conservative basis you will have an EPS of between Rs 90 to 100 for the full-year, which means that the current price of Rs 600 you have a stock which is available at six to seven PE, which I believe is extremely reasonable.