NMDC Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Record Q1 volumes, margin intact: Production and sales hit all-time Q1 highs, and despite multiple price cuts, a fixed-cost structure drove cost per tonne low enough to keep the annual EBITDA margin target of 41% on track.
• Nagarnar steel plant is now live: The blast furnace was commissioned on August 12, with hot metal flowing; full commissioning is imminent and the plant is expected to produce ~0.1 crore tonnes in H2 FY24.
• A royalty windfall and a sweetheart deal: NMDC won the Karnataka royalty case, cutting the rate to 10% and unlocking a ₹990 crore refund, while the Hancock deal on Mount Bevan brings in cash with zero future funding risk.
• Volume growth is the core thesis: Management is executing a plan to leap from ~5 crore tonnes to 10 crore tonnes in 5-7 years, with a capex run-rate set to hit ₹7,000-8,000 crores in three years.
• What to watch next quarter: Whether the monsoon exit triggers a price recovery, the pace of the Karnataka capacity ramp-up in October, and any update on the SPV amount from the Supreme Court petition.

Volume & Operational Performance

• Best-ever Q1: Production and sales in April, May, and June were individually the highest for any Q1 in NMDC's history, making this the best quarter outside of a typical Q4.
• Sales outstripped production: Cumulative sales through July exceeded production by about a million tonnes, providing strong operating leverage.
• Fixed-cost advantage: As a fixed-cost industry, higher volumes directly reduced the cost per tonne, a dynamic that management says fully compensated for the loss of pricing power during the quarter.
• 365-day operations target: NMDC plans to eliminate weekly offs and move to 365-day working starting in January, with equipment ordered and recruitment underway; any delay would push the timeline out.
• Third shift in Chhattisgarh: A third shift is being planned for a couple of mines currently running two shifts, increasing both material movement and manpower.
• Railway wagon shortage: The evacuation bottleneck is not line capacity (now 4 crore tonnes) but wagon availability; NMDC needs 18-19 rakes daily but is currently getting only 13-14, limiting Bailadila's rail offtake to 2 crore tonnes against 3 crore tonnes of production.

Mukherjee: "this has been the best quarter Q1 ever since inception for NMDC and not only Q1 it has been the best Q1, Q2, Q3 aside the Q4 which is of course always the star quarter if you leave out that quarter so this has been the best ever quarter except in Q4."

Pricing & Margin Dynamics

• Severe and sustained price pressure: No price increase has been possible this financial year; NMDC has reduced prices multiple times, including a marginal adjustment just days before the call. Management hopes prices have bottomed out.
• Q1 average realization explained: The Q1 domestic realization of ₹4,850/tonne was only a marginal 4% sequential increase over Q4's ₹4,663, driven by a price increase taken around March. Prices have declined every month since.
• Integrated pricing mechanism: NMDC aligned its pricing with the IBM all-inclusive method, a practice already followed by all other merchant miners. The liability for the 22.5% additional royalty remains on the netback method, with no change to NMDC's exposure.
• Margin sustainability: Management is confident of maintaining a 41% annual EBITDA margin because the cost-per-tonne reduction from higher volumes offsets the loss of pricing leverage.
• No visibility on price recovery: After the monsoon, if demand picks up, prices may rise, but management currently sees no visibility of anything significant happening on the price front.

Mukherjee: "I hope we have bottomed up and the prices would go up. The good thing is that since the volumes have gone up and this is a fixed cost industry so your cost per tonne has come down so that really compensates for the loss of pricing leverage."

Growth Projects & Diversification

• Nagarnar steel plant: The blast furnace was commissioned on August 12 and hot metal is now flowing. Full commissioning is expected between August 20th and 23rd. The plant should produce about a million tonnes in H2 FY24, with full capacity achieved next year once input constraints are resolved.
• Karnataka capacity ramp-up: Environmental clearance for an additional 1 crore tonne capacity has been obtained, with one more clearance from the Monetary Committee pending. The target is to operationalize the additional capacity around October 1, 2023.
• Bacheli screening plant: A 0.2 crore tonne capacity upgradation through debottlenecking is expected to commission by end-September or October, adding roughly 0.15 crore tonnes.
• Railway line upgradation: Over 100 km of the 50 km railway line upgradation has been commissioned and trains are running. The last 25-30 km stretch is under construction and expected to be delivered phase-wise by the end of this financial year.
• Karnataka screening plant: A 0.7 crore tonne capacity plant, upgradable to 10 crore tonnes, was tendered out last week.
• Kirandul downhill conveyor: A 1 crore tonne capacity downhill conveyor and crushing system at Kirandul 14C is being tendered next week.
• Customer concentration risk: 70% of sales go to three major buyers (RINL, JSW, ArcelorMittal, KOCL). Management acknowledges this as a business risk and plans to diversify through intermediate stockyards and blending yards, though this will take 3-4 years.
• Export strategy: Exports are currently uneconomic on a netback basis due to the 30% duty, freight, and royalty. However, management intends to keep the export window open for volume absorption and to sustain domestic prices as production ramps up.

International & Mineral Diversification

• Australia gold mining: Legacy's first gold mine is expected to start operations around end-September, with all approvals except one expected by month-end. The operation is experimental, targeting $15-20 million in proceeds to be plowed back into 4-5 adjoining gold tenements for a future at-scale phase.
• Mount Bevan deal with Hancock: NMDC's 60% stake in Mount Bevan was restructured into a deal with Hancock that management calls a "sweetheart deal": zero risk, no future funding required, $10 million received to sign, and NMDC retains 30% ownership. Initial PFS technical results are encouraging, but operationalizing the mine will take at least 4-5 years.
• Australia magnetite partnership: NMDC has tied up with Atlas for magnetite exploration, with the PFS in final stages and initial results very encouraging. The tenement could support a 1.5 crore tonne magnetite iron ore mine in 5-6 years and also has potential for lithium and other minerals.
• Lithium exploration: Terms are similar to the iron ore deal, with NMDC holding 75% off-take rights. The PFS will take around 18 months, and if successful, another 3 years to reach mining.
• Legacy's exploration reality: Legacy is a junior mining company whose main business was exploration, not mining. Management cautions that the success rate in deep-seated minerals is "as good as going to a casino and winning a jackpot," and it is wrong to expect a definitive mining plan from such an entity.

Mukherjee: "it is a sweetheart deal we do not have any downside and all the possible upsides"

Capital Allocation & Investor Returns

• Capex trajectory: FY24 capex is officially targeted at ₹1,600-1,700 crores but likely to reach around ₹2,000 crores. FY25 capex will be a minimum of ₹2,500 crores. Once all projects are sanctioned, the run-rate will hit ₹7,000-8,000 crores three years from now.
• Karnataka royalty refund: NMDC won the case to pay only 10% royalty instead of 20% and has received a refund of around ₹990 crores.
• SPV amount petition: NMDC has petitioned the Supreme Court for the balance SPV amount and is confident of a favorable decision, though the timeline is not within management's control.
• Dividend-yield perception: Management believes the lack of capital appreciation stems from NMDC being viewed as a dividend yield stock rather than a capital appreciation stock, noting its dividend yield is among the highest in the country and the world.
• Coal block progress: Tokisud is in the land acquisition phase with an MDO appointed and CBA Act notifications applied for; mining could begin around year-end or early next financial year. Rohne is more than a year away, targeting mid-FY25.

Mukherjee: "most of the PSU stocks are taken as a dividend yield stock rather than a capital appreciation stock... fortunately or unfortunately we fall under the sort of a dividend yield category of investment"

Guidance & Commitments

Key Metrics