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Focus on backward integration and cost competitiveness…

We recently met with the management of Lloyds Metals & Energy Ltd (LMEL) and came out positive on the company’s operations and its future capacity expansion plans. The conversations surrounded on both the industry dynamics and how LMEL is shaping up in the Indian iron ore space. The key highlights of our conversations can be found in the report. Lloyds Metals and Energy Ltd currently trades at a 7.2x FY26E EV/EBITDA.

Mining expansions to be the base of future expansion plans

LMEL is currently executing a capacity expansion at its sole mine located in the Gadchiroli region of Maharashtra, with production set to increase from 10.0 million tonnes to 25.0 million tonnes by the fourth quarter of FY25. This expansion forms a critical foundation for the company's long-term strategy of forward integration into the steel sector, which is poised for significant growth in India due to increasing steel demand. While the steel sector is witnessing rapid capacity expansions, similar growth is not being observed in the merchant mining industry. LMEL aims to establish itself as one of the largest merchant iron ore producers in the country through their current expansion program.

Focus on cost-optimization is the key

LMEL's mine was allotted before 2014, allowing it to fall under the older royalty structure, which does not include a royalty premium, thus minimizing the impact on the cost profile. Additionally, the company is in the process of establishing two slurry pipelines from its mines to its manufacturing facilities, significantly reducing transportation costs while enhancing its ESG profile. The slurry pipelines are expected to lower costs by Rs 600-700 per ton, contributing to margin expansion. The company's focus on cost optimization is likely to limit the effects of price volatility on its margin profile.

Forward integrating into steel to be supported through current capex

LMEL plans to execute its extensive capital expenditure program of over Rs 30,000 crores over the next 5-6 years entirely through internal accruals. The management has reiterated its commitment to funding the entire capex without resorting to debt. Upon completion of the current phase of expansion, the company intends to forward integrate into steel production. Future projects include the development of a 1.2 (mtpa) wire rod steel plant and a 3.0 mtpa hot-rolled coil (HRC) plant. The 1.2 mtpa wire rod plant is expected to be commissioned by June 2027. LMEL is strategically positioned to capitalize on the rising steel demand in India, leveraging its backward integration initiatives aimed at reducing its cost burden.

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