Change in Mining act, not a game changer
Street is excited on expectation of fast clearance of NMDC’s Donimalai iron ore mines with the change in Mines and Minerals Development and Regulation (MMDR) act introduced by Govt of India for renewal of mines. The revised provisions removed ambiguity on the interpretation of law with the insertion of clear directions for renewal. However, we believe that development is unlikely to result in any material positive for NMDC as
1) the State govt has the final right to approve the renewal and it would use this as a tool to prolong the proceedings for bargain on its rationale of revenue loss and
2) steep erosion in prices with sharp increase in supplies from auctioned C-category mines and resumption of NMDC’s mine (unlikely to restart for next couple of years). In spite of NMDC’s mines not being in operation for last one year, steel production in Karnataka have not impacted due to start of supplies from C-category mines and increase in production from other mines operating below capacity.
Hence, we believe that Street is overlooking the structural risk to the largescale iron ore merchant mining business given the clear competitive edge to the steel producers in auctions and Govt’s policy to restrict use of mineral reserves for domestic consumption. Hence, Our Reduce rating on NMDC (with TP of Rs90) remains unmoved, as the changing business environment would outweigh any benefit from change in policy to accommodate mine renewal
* State govt supersedes in renewal/clearance of mining lease:
The prolonged delay in clearance of OMDC’s (CPSU) iron ore mines, take over of Tata steel’s operational chrome ore mines by Odisha Govt, cancellation of limestone mines in Rajasthan and imposition of penalty for excess mining illustrates the supreme say of the state govt in mining clearance. The likely argument on potential revenue loss to State govt’s exchequer in form of royalty due to closure of Donimalai mines would be offset by higher revenues from auctioned mines and state owned mines in wake of higher prices.
* Commencement of auctioned and NMDC mines would erode the prices:
About 10 mines are expected to commence production in Karnataka over next one year with capacity of 6-7mnt. Majority of these mines were won by steel producers in auction for their captive use. This coupled with resumption of NMDC’s mines is likely to come down heavily on iron ore prices. We see a fall of 20-25% in prices
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