NMDC seeks exploration tie-ups with state governments

With an eye on securing its long-term growth, NMDC, India’s biggest iron ore miner, is eyeing tie-ups with state governments to prepare exploration data for them.

While NMDC is offering this service free of cost, it is hoping that state governments will give it stakes in the mines that come up on the basis of the data.

This will not only help the company expand presence in terms of the number of assets it has, but will also increase its output and asset portfolio in other minerals.

Currently, NMDC has access to three mines — two in Bailadila region of Chhattisgarh and one in Donimalai, Karnataka. These mines currently produce 29 million tonnes of iron ore. NMDC has estimated ore reserves of close to 1.2 billion tonnes.

“We have written letters to the state governments that we would like to explore for iron ore and other minerals and then pass on the data to them free of cost,” said Rana Som, chairman and managing director, NMDC.

Som said Indian mineral reserves are almost static for the last several years and a lot of it remains to be explored. Since there is no centralised agency except the Geological Survey of India to do the exploration work, NMDC felt it should leverage its exploration expertise and extend the service to the state governments, he said.

“Although we will not put any claims to the mines we explore, but NMDC being a public sector entity, we feel the state governments would like to reciprocate our free service by giving us mining rights,” he said.

NMDC has already signed memoranda of understanding with Andhra Pradesh and Jharkhand government and talks are on with West Bengal.

It has sent a team to Jharkhand which is exploring mineral reserves there.

NMDC, of late, had been keen at diversifying its asset portfolio and had applied for and was granted mining leases for limestone and magnesite. It also has a diamond mine in Madhya Pradesh.

However, analysts say that NMDC had not been too aggressive on the acquisition front as compared with its biggest competitor Sesa Goa, a Vedanta Group company.

This is especially because it has the highest reserves and greater lives of its mines, they say. But to remain competitive, NMDC will have to adopt innovative ways of diversification and asset expansion, since Sesa Goa had been far too aggressive, they say.

Analyst Vikas Agarwala of Micorsec Securities in an October 2010 report, said, Sesa Goa’s sales volumes have increased at a CAGR of 14.3% over the period between 2001 and 2010, on account of increase in reserves primarily due to acquisition of additional mines through purchase of Dempo and Balco.

But NMDC’s volumes have increased by a mere 3.2% over the corresponding period. While Sesa Goa has increased its sale volumes every year since inception, NMDC has shown decline in volumes in the last two years.

“From valuation perspective, Sesa Goa is structurally attractive as compared to NMDC from all the parameters. This gains further traction, given the fact that return ratios of Sesa Goa in terms of return on equity (RoE) and return on assets (RoA) is almost two times as compared to NMDC,” he said.