NMDC Ltd has said that the government will explore a strategic sale of its 3 million tonnes (mt) under-construction steel plant.
This decision raises some questions.
Initially, the decision to diversify into steel-making seemed puzzling as global iron ore majors have stuck to mining, and forward integration has not been a strategy of choice.
NMDC wanted to capture more of the steel value chain, feeding its iron ore output to the steel plant, and it had the cash, too.
As of March 2016, NMDC has invested Rs9,162 crore in the plant, which has a total cost of Rs15,500 crore, according to news reports.
A recent company presentation says load trials at the steel plant are expected to start by December 2017.
That’s not all.
NMDC’s annual report says land has been acquired in Karnataka for another 3 mt steel plant, while there are plans for another one in Jharkhand.
Does the exit from Chhattisgarh mean these plans will be put on hold?
If NMDC will focus only on mining, then the shareholders deserve to know that.
Or is it that the government wants NMDC to retain its cash-surplus position?
As of 31 March, NMDC had a bank balance of Rs14,764 crore. This is after a poor year in FY16 when profits halved due to lower iron ore prices.
However, it has spent Rs7,528 crore on a buyback plan in FY17, as part of the government’s move to raise resources.
The steel project itself needs additional investments, and it has a number of mining projects in various stages, which will require funds.
These would lead to a significant drawdown of resources.
That may have restricted funds availability, although NMDC has enough headroom to raise debt.
Funds would be needed for projects, paying dividends or even if the government takes money out through buybacks.
Divesting the steel project can give it more breathing space, but makes sense only as a strategic call to exit all steel projects.
If the move only serves a narrow objective to raise resources, it will disappoint investors.
Also, selling a running steel plant can be more remunerative than an under-construction one.
Once the bidding process commences, more clarity on the kind of interest the plant generates should be visible.
On the brighter side, iron-ore prices have been rising globally.
NMDC’s iron-ore lump prices have risen by a much slower rate than fines have.
The price of lump iron ore was Rs1,700/tonne as of 3 July which is now higher by 9.4%, while that of fines was Rs1,460/tonne and has risen by 23.5%.
Lumps contribute to 36% of NMDC’s iron ore sales by volume while fines contribute the rest.
Higher realizations (especially if lump prices increase further) should lead to better profits, assuming output grows.
While shares of NMDC have gained by 24.5% since early July, they have declined by 16% from its peak levels of early November.