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We initiate coverage on National Mining Development Corporation (“NMDC” or “the company”) with a bullish BUY rating based on the following factors: (1) Aggressive mine capacity expansion to meet the upcoming demand (2) Long-term benefits of steel plant demerger that would improve balance sheet quality and help shift focus to iron ore business (3) NMDC being the preferred iron ore supplier of the industry, and (4) Strong demand from domestic steel industry in coming years.

Aggressive mine capacity expansion to meet the upcoming demand

NMDC plans to expand its current capacity of 45mtpa to 67mtpa in the next 2-3 years. The management believes it can reach levels of 70-75mtpa in the same timeline if the current macroeconomic pressures cool off in the short term. In addition to mining and evacuation expansion, the company is also planning to set up a pellet plant to explore the global pellet industry and cash in on the upbeat iron ore prices. The company expects to incur capex of Rs. 3,000 crores per annum going forward to achieve their goal of a 100mtpa mining capacity by 2030.

Long-term benefits of steel plant demerger that would improve balance sheet quality and help shift focus to iron ore business

NMDC demerged its steel plant into a separate entity – “NMDC Steel”. The 3mtpa steel making capacity was a step in forward intergration, in line with the National Steel Policy, 2017 to achieve 300mtpa of capacity by FY 2030-31. However, we believe the demerger will remove the capex overhang and improve the quality of NMDC’s balance sheet, clearly a step in the right direction. The company had incurred ~Rs 23,000 crore capex to set up the plant, injecting cash from its high-margin iron ore business. Post the demerger, NMDC can focus on its iron ore business which has expansions planned in the coming years and the company can gainfully use the internal cash accruals for the same.

NMDC being the preferred iron ore supplier of the industry

Being the largest iron ore producer in the country, NMDC is a leading and the most preferred iron supplier in the industry. The domestic steel players apart from the backward integrated steel producers need to source iron ore needs either domestically or through the global markets. India, being rich in iron ore reserves and having highgrade ore at its disposal has iron ore deposits all throughout its eastern belt majorly in the states of Jharkhand and Orissa. NMDC being one of the oldest and a holder of the maximum number of mines in India becomes the perfect supplier for the domestic companies to source the raw material needs as compared to global suppliers. NMDC pricing is on a big discount as compared to the global players. Players like JSW Steel, Arcelor Mittal Nippon Steel, Jindal Steel and Power all source their raw material needs through NMDC. With the following demerger of the steel plant, NMDC also becomes the primary and the sole supplier of the raw material to NMDC Steel thereby ensuring new clients and avenues for revenue generation.

Strong demand from domestic steel industry in coming years

India is the only nation in the world with a growing steel capacity, and the government is taking proactive measures to help steel producers expand capacities both through greenfield and brownfiled routes. Indian steel industry is projected to reach 300 mtpa capacity by 2030, almost double the current capacity. Most capacities would happen through the BF/BOF route, and NMDC will stay focused on domestic players for the foreseeable future. There is ample scope for expansion given the burgeoning iron ore demand in India and growing steel capacities.

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