Metals & Mining May 20, 2015 In line with our expectation, Government of Odisha executed mining leases (ML) of eleven iron ore mines closed since May 17, 2014 due to want of ML. These mines in aggregate produced ~19m tonnes of iron ore in FY14. We expect production to resume during May/1st week of June at all these mines. In the backdrop of improved domestic supplies, we believe that JSW Steel (JSTL) and other non‐integrated steel producers would benefit due to lower domestic iron ore prices and firming global iron ore prices. JSTL remains our preferred pick in the steel sector. Kamlesh Bagmar [email protected] +91‐22‐66322237 Ankit Shah [email protected] +91‐22‐66322244 Sensex v/s BSE Metal Index BSE Metal Index

MMDR bill ‐ the new catalyst: Thanks to the intervention of the High Court and introduction of new MMDR bill by the Government of India, Government of Odisha was pushed to expedite the execution of ML. We continue to maintain that Odisha’s iron ore production would increase to 78‐80m t in FY16 from the 9‐year low of 52m t in FY15 on the back of resumption of operations of closed mines and expanded capacity of four mines by 28m t. 
Domestic iron ore prices in deep correction; Iron ore outlook remains weak: Domestic miners reduced prices by 25‐30% YoY or Rs800‐950 (US$13‐15)/t. Compared to peak price levels of July‐Dec 2014, prices are down 35‐40% or Rs1400‐1600 (US$23‐26)/t. We expect further price cuts of Rs100‐200/tonne in the next couple of months as increased supplies from Odisha would hit the markets. More importantly, the differential between imported and domestic prices rose to ~78%, the highest levels in the last 12 months on the back of fall in domestic prices. 
Outlook and Valuation: Domestic iron ore prices remained relatively firm in comparison to the sharp meltdown in global iron ore prices, thereby, negatively impacting the cost competitiveness of non‐integrated Indian steel makers. The impact on earnings aggravated for non‐integrated producers due to dearth of domestic supplies and strong domestic iron ore prices (contrary to global prices) in the wake of closure of mines across prominent mining states. With the resumption being imminent, we see better outlook for non‐integrated steel producers compared to integrated producers like Tata Steel and SAIL. JSTL remains our top pick in the sector, driven by attractive valuations, revival in margins (due to fall in domestic ore price) and strong quality of operations. Sensex
130
120
110
100
90
80
May‐15
Mar‐15
Jan‐15
Nov‐14
Sep‐14
Jul‐14
May‐14
70
Source: Bloomberg Stock Performance (%) 1M Sensex (0.2) BSE Metal Index (0.3) Coal India (3.2) Hindustan Zinc 3.1 JSPL (11.4) JSW Steel (4.3) SAIL (9.1) Tata Steel 4.9 NMDC 4.3 Exhibit 1:
6M (0.8) (10.8) 12M 14.2 (17.6) 3.8 8.1 (6.2) (23.8) (21.6) (22.6) (8.8) (1.8) 16.1 (52.8) (24.9) (24.5) (22.6) (25.8) PL Valuation Matrix Company Name Rating CMP (Rs) TP (Rs)
Hindustan Zinc BUY 176 Jindal Steel & Power Reduce 137 JSW Steel BUY 922 1,200
Steel Authority of India Reduce Tata Steel Accumulate 361 Coal India Accumulate 361 NMDC Accumulate 132 67 Source: Company Data, Bloomberg, PL Research EBITDA (Rs m) EPS (Rs) PE (x) P/BV (x) EV/EBITDA (x) FY16E
FY17E
FY16E
200
71,692
75,721
19.0
20.5
9.3 8.6 1.5 1.3
8.7
7.6
140
76,580
83,998
17.8
22.8
7.7 6.0 0.6 0.5
7.3
6.7
97,908 116,446
59.5
95.9
15.5 9.6 0.9 0.9
7.4
6.1
93,615
6.4
10.4
10.5 6.4 0.6 0.6
9.4
7.1
380 158,393 187,659
25.2
42.9
14.4 8.4 0.8 0.8
7.2
6.0
412 193,122 223,056
27.1
31.0
13.3 11.6 5.0 4.5
8.5
7.0
141
12.3
13.6
10.7 9.8 1.6 1.5
6.3
5.8
63
64,556
59,164
68,915
FY17E FY16E FY17E FY16E FY17E FY16E FY17E
(All prices as on May 20, 2015) Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report Sector Update Restarting of mines in Orissa, JSTL our best pick Exhibit 2:
Metals & Mining Despatches of merchant iron ore miners in Odisha rose 5% YoY after consecutive de‐growth for last 7‐months Miner name Location Apr‐15
A.M.T.C. (P) Ltd Narayanposhi ‐
160,210 ‐ Closed due to SC order Bonai industrial co. ltd Teherai ‐
65,764 ‐ Closed due to SC order Bonai industrial co. ltd Nadidih ‐
100,002 ‐ Closed due to SC order Feegrade and co pvt. Ltd Rengalibeda , Nadikasira ‐
102,996 ‐ Closed due to SC order K.N. Ram and Co. Roida‐II ‐
183,363 ‐ Closed due to SC order Kalinga Mining Corpn. Jurudi ‐
50,071 ‐ Closed due to SC order Kaypee Enterprises Thakurani ‐
49,397 ‐ Closed due to SC order M.G. Mohanty Patabeda 2,995 1,000 199.4 Operational B C Dagara Suleipat 54,178 20,965 158.4 Operational M.G. Mohanty Patabeda‐19.425 HA 23,014 1,942 1,085.0 Operational Korp Resources (P) Ltd. Tantra 14,715 3,674 300.5 Operational MGM Minerals Ltd. Patabeda 34,698 15,694 121.1 Operational National Enterprises Raikela 60,326 19,976 202.0 Operational Penguin Trading and Agencies Ltd. Raikela 81,537 71,349 14.3 Operational Rungta Sons (P) Ltd. Sanindpur 187,744 174,135 7.8 Operational Rungta Sons (P) Ltd. Oraghat 167,941 78,989 112.6 Operational S.N. Mohanty KJST‐Jaldihi 26,812 27,203 (1.4) Operational Lal Traders and Agencies (P) Ltd. Badampahar 13,101 20,218 (35.2) Operational Indrani Patnaik Unchabali 206,939 271,804 (23.9) Operational Rungta Mines Ltd. Jajang 570,869 561,386 1.7 Operational M/s Serajuddin and co. Balda Block 1,149,234 398,508 188.4 Operational O.M.C. Ltd. Kurmitar Pahar 47,883 66,105 (27.6) Operational O.M.C. Ltd. Gandhamardan ‐B 40,689 ‐
‐ Operational O.M.C. Ltd. Daitari 97,979 48,281 102.9 Operational Essel Mining and Industries Ltd. Nuagaon, Kadodiha 100,488 150,194 (33.1) Operational Ghanashyam Misra and sons (P) ltd Gorumahisani 35,773 29,557 21.0 Operational 2,916,916 2,775,253 5.1 Total Apr‐14
% Change Reason Source: Govt of Odisha, PL Research Despatches of merchant miners in Odisha Exhibit 3: Monthly despatches of merchant iron ore miners in Odisha 5.5
despatches from expanded capacity at
5.0
some of the operational mines
4.5
(m tonnes)
grew 5% YoY on the back of additional
4.9
4.4
5.2
4.4
4.2
4.0 3.6
3.9
3.5
3.5
2.8
3.0
2.9
2.6
2.3
2.3
2.5
1.8
2.0
Apr‐13
May‐13
Jun‐13
Jul‐13
Aug‐13
Sep‐13
Oct‐13
Nov‐13
Dec‐13
Jan‐14
Feb‐14
Mar‐14
Apr‐14
May‐14
Jun‐14
Jul‐14
Aug‐14
Sep‐14
Oct‐14
Nov‐14
Dec‐14
Jan‐15
Feb‐15
Mar‐15
Apr‐15
1.5
Source: Govt of Odisha, PL Research May 20, 2015 2
Metals & Mining Govt. of Odisha executed ML of 11 iron ore mines which were closed since May 2015 due to want of ML. These mines could potentially add production of ~19‐20m tonnes in FY16 assuming the conservative pre‐closure run‐rate of despatch. Exhibit 4:
Capacity and FY14 production details of mines which got their leases executed recently by the Govt. of Odisha Lessee Location EC approved quantity (mtpa) FY14 production (m tonnes)
A.M.T.C. (P) Ltd Narayanposhi 3.00 2.79
Bonai industrial co. ltd Teherai 1.86 1.00
Bonai industrial co. ltd Nadidih 1.20 1.77
Feegrade and co pvt. Ltd Rengalibeda , Nadikasira 2.88 2.09
K.J.S. Ahluwalia Nuagaon 1.00 4.81
K.N. Ram and Co. Roida‐II 2.20 1.71
Kalinga Mining Corpn. Jurudi 0.10 1.45
Kaypee Enterprises Thakurani 5.50 0.00
Mid East Int. Steel Ltd. Roida ‐ I, Sidhamath 3.00 2.04
R.P. Sao Guali 5.70 0.12
TATA Steel Ltd. Khandbandh Total 8.00 0.79
34.44 18.58
Source: Ministry of environment and Forest (MoEF), Govt of Odisha, PL Research Supplies from Odisha would further expand by 28m tonnes on the back of additional capacity approved by the MoEF for the operational mines in the last six months. Among the mines, benefit of Serajjudin’s Balda mines’ increased capacity is already visible as the production is already ramped‐up to peak capacity. Impact of Rungta mines’ increased capacity, on the other hand, would be visible only in FY16. Exhibit 5:
Lessee Rungta Details on incremental capacity of mines approved by MoEF Approved capacity as per Mine name prior EC (m t)
Oraghat 1.9
Incremental capacity permitted as per new EC (m t) 3.1 Approved capacity as per new EC (m t)
5.0
Rungta Sanindpur 1.7
2.9 4.5
Rungta Jajang 5.5
11.0 16.5
Serajjudin Balda 4.5
10.7 15.2
13.6
27.6 41.2
Total Source: MoEF, PL Research May 20, 2015 3
Metals & Mining Global iron ore prices (62% Fe) rose ~24% in the fortnight from the low of US$47/t to current levels of ~US$59/t. We believe that prices would see equilibrium at US$65/t, given the ongoing adjustment in supplies with the closure of high cost mines, deferment of new supplies and growing supply discipline among miners. We expect domestic prices to remain weak Exhibit 6: Gap between Global and NMDC’s prices expanded to near 12‐month high due to increased supplies. This will once
NMDC price ( incl. Royalty) Global iron ore price
again widen the discount of NMDC’s ore to
May‐15
Mar‐15
Jan‐15
Nov‐14
Sep‐14
Jul‐14
May‐14
Mar‐14
Jan‐14
Nov‐13
Sep‐13
Apr‐13
(US$ / t)
increased competitiveness of JSTL
150
135
120
105
90
75
60
45
30
Jul‐13
global ore prices; hence, would result in
Source: Bloomberg, PL Research Domestic miners reduced prices by 25‐30% YoY or Rs800‐950 (US$13‐15)/t. Compared to peak price levels of July‐Dec 2014, prices are down 35‐40% or Rs1400‐
1600 (US$23‐26)/t. We expect further price cuts of Rs100‐200/tonne in the next couple of months as increased supplies from Odisha are expected to hit the markets. Exhibit 7: Prices of key domestic merchant iron ore miners low in May 2015
Serajuddin
NMDC
4300
3900
3500
3100
2700
2300
1900
May‐15
Mar‐15
Jan‐15
Nov‐14
Sep‐14
Jul‐14
May‐14
Mar‐14
Jan‐14
Nov‐13
Sep‐13
May‐13
Mar‐13
1500
Jan‐13
63% Fe price (Rs/t)‐incl. Royalty
Rungta Jul‐13
Domestic prices (incl. Royalty) fell to 5‐year Source: Industry, PL research May 20, 2015 4
Metals & Mining With the steep increase in global prices and cut in domestic prices undertaken by NMDC, premium of NMDC ore’s landed cost to imported ore fell to 8‐month low of 2% at JSTL’s Dolvi plant. Seeing the sizeable supplies available with NMDC at its eastern mines and improved supplies in Odisha, we expect current trend to reverse with discounts in the range of 10‐15% over imported ore prices. Premium of NMDC ore’s landed cost (at JSTL’s Dolvi, Maharashtra plant) to imported ore at six‐month low 9,500
43 44 39
38
(Rs/t)
8,500
41
48 47 42
32 32
44 41
38
34
28 29
Discount of NMDC ore to imported ore (%) (RHS)
18
7 11
10
7,500
0
6,500
‐6
5,500
‐13
‐18
‐2
‐18 ‐21
‐22 ‐20
4,500
May‐15
Apr‐15
Feb‐15
Dec‐14
Nov‐14
Oct‐14
Sep‐14
Aug‐14
Jul‐14
Jun‐14
May‐14
Apr‐14
Feb‐14
Mar‐14
Jan‐14
Dec‐13
Nov‐13
Oct‐13
Sep‐13
Jul‐13
Aug‐13
Jun‐13
May‐13
Apr‐13
Mar‐13
Jan‐13
Feb‐13
3,500
60 50 40 30 20 10 0 ‐10 ‐20 ‐30 (%)
10,500
Landed cost of NMDC ore
Mar‐15
Delivered cost of imported ore
Jan‐15
Exhibit 8:
Source: Bloomberg, PL Research May 20, 2015 5
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PL’s Recommendation Nomenclature 44.7%
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