Stock Review: NMDC

NMDC has been pursuing a very aggressive global expansion strategy of late, thereby making good use of its huge cash reserves in an environment where domestic mining licences are hard to come by and in light of the Naxalite activities that are curbing expansion.

The country's largest miner recently announced a joint venture with Russia's Severstal to set up a five million tonne steel plant in Bellary with an investment of . 9,000 crore. It is expected to be completed over the next three years.
This announcement came shortly after the company signed a memorandum of understanding with Minemakers to develop a phosphate mine in northern Australia and another with Perth-based company, Legacy Iron Ore, to acquire 50%. The company is also in talks to acquire a controlling stake in a Brazil-based mining company, Greystone Mineracao do Brasil. It is also exploring assets in Alabama, the US, Tanzania and South Africa.

But, despite the company's success rate with recent deals, some have fallen through, such as the 51% acquisition of the mines of Kolmar Coal Company. Also, its joint venture with Arcelor Mittal in Senegal has been stalled on account of certain local government issues.

During the March 2011 quarter, the company's net sales and net profit almost doubled to . 3,769.8 crore and . 2,098.6 crore, respectively, registering the highest growth in eight quarters, on account of higher price realisation. Sales growth was driven by an increase in domestic demand, while exports were lower by 25%. This was primarily due to the 10% royalty and 20% export duty the government has levied on iron ore. Furthermore, rail carriers have nearly tripled freight rates on exports to about . 1,800-2,000/ tonne. As a result, NMDC, which currently exports about 14% of its total production, could be forced to reduce exports, hereon.

The company has no debt and its cash balance increased by 35% to . 17,228 crore as on March 2011. At . 256, the stock trades at a 12-month trailing price-toearning ratio of 15.6 times. Even as the company gears up for huge growth over the next three years, there are some concerns in the near term as operations at Bailadila, which contributes 75% of volumes, continues to be impacted by Naxalite activities.