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Sandur Manganese and iron ore Ltd. (SMIOL) is a 6-decade old, lowest cost iron ore and manganese ore mining business; currently undergoing transformation of its existing operations. Expansion of the Environment Clearance (EC) limit for its iron ore mining operations and the newly setup coke business together hold the potential of more than doubling SMIOL’s earnings over 3years. Shift from coal based power generation to very economical waste heat recovery gas power, will turn around its loss making ferro-alloy division.

Further, the on-going commodity bull run will lead to huge cash accumulation translating into a net cash balance sheet in FY22E and creating potential for large brownfield expansions. SMIOL is trading at extremely attractive valuations of 2.6x FY23E EV/EBITDA and is poised for large re-rating in our view.

* Iron ore EC expansion and new coke business to double earnings:

SMIOL’s venture into new coke business and ramp-up in iron ore mining post expansion in EC limits will together drive the next leg of exponential earnings growth. With iron ore mining operations running at 99% utilisation (FY20), doubling of EC limit in a deficit market scenario (due to disruptions created by Odisha merchant mine auctions) will ensure faster rampup in offtake for SMIOL. Addition of new stream of coke business in the south India market which has scarcity of converted coke and ensured 50% offtake through contract with south based pig iron producer, will easily add Rs4bn-7bn in revenues in next 2-3years. Our discussion with this pig iron producer indicates that SMIOL has been actively delivering coke in open market. We expect both these initiatives to drive the 41%/20% CAGR growth in Revenue/PAT over FY20-23E.

* Turnaround of ferro-alloy division to improve profitability:

Change of power source for ferro-alloy furnace is expected to stop operating losses and improve overall profitability of the company. This will be possible as power will now be generated from the waste heat recovery gas produced by the newly installed coke ovens and not through the expensive thermal coal route. This will lead to cost savings of Rs400-700mn which we believe is a game changer rather than ensuring 100% coke offtake. Expansion of ferroalloy furnace capacity by installing new 24MVA furnace will further provide enough room to ramp-up silico-manganese production.

* Commodity bull-run to aid company turn net cash in FY22E:

SMIOL’s business transformation will be heavily supported by the ongoing commodity bull run thereby leading to strong cash accumulation. SMIOL’s main offerings i.e. iron ore, manganese ore and silico-manganese have witnessed 170%/23%/61% rise in prices YoY basis which will lead to abnormally high revenue and earnings growth in FY22E; turning the company’s balance sheet to net cash. With modest pricing assumptions for FY23E estimates, we still end up with substantial upside to ride the commodity cycle.

* Under-valued and under-researched stock => poised for re-rating:

We believe that the stock is highly undervalued (trading at 2.6x FY23E EV/EBITDA) when compared to mining peers as the street awaits clarity on coke offtake and EC expansion. We value the company at 5x FY23E EV/EBITDA to arrive at a fair value of Rs2750/share and ~62% upside. We believe the company deserves a multiple of 5x (~25% premium to its historical 5-year avg. valuation) due to its steep earnings growth, turnaround of the ferro-alloy division, robust cash accumulation to turn net cash in FY22E. Triggers for rerating: Rise in earnings trajectory, approval of EC expansion, further surge in commodity prices if any. Downside risk: Capital misallocation, commodity price risk.

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