Miner Risks $558 Million in Maoist-Hit Areas: Corporate India

NMDC Ltd., India’s largest iron ore producer that’s twice been a target of Maoist rebels, is building a 30 billion-rupee ($558 million) pipeline to bolster sales stunted by guerilla attacks.

The state-owned company will start the project in six months and on completion in three years, the pipe may carry 8 million metric tons of ore slurry annually from its mines in the central state of Chhattisgarh to Vishakapatnam in neighboring Andhra Pradesh, Finance Director Swaminathan Thiagarajan said in an interview. The line will be laid along highways, where it is less vulnerable than in dense forests, he said.

NMDC is seeking to boost iron ore sales and stem a decline in revenue after Maoists in October 2011 blew up a pipeline carrying the raw material to its biggest buyer, Essar Steel Ltd., two years after the first attack on the same target. The rebels, active in about a dozen of the country’s 28 states, have engaged in a campaign of violence against the government for years, prompting Prime Minister Manmohan Singh to call the insurgents the greatest threat to India’s internal security.

“We are trying our level best to touch last year’s” sales level, Thiagarajan said in the interview from his office in Hyderabad. “If it hadn’t been for the Essar issue, we may even have surpassed it.”

Misses Estimates

The new project is crucial for the miner to ensure supplies to customers and to raise capacity by 50 percent to 48 million tons by 2015. Ore sales at NMDC may reach 27 million tons in the financial year ending March 31, about the same as the previous 12 months and 17 percent below the company’s target, he said. Output has remained below a peak of 29.8 million tons touched in the year ended March 31, 2008.

NMDC shares rose 1.2 percent today in Mumbai, the most in a week, to 148.55 rupees. The stock has declined 10 percent this year, compared with a 0.4 percent gain in the benchmark Sensitive Index, according to data compiled by Bloomberg.

The company yesterday reported a profit of 12.9 billion rupees in the quarter ended Dec. 31, missing the median estimate of 14.3 billion rupees in a Bloomberg survey of 17 analysts. Sales dropped 27 percent to 20.5 billion rupees as heavy rainfall cut production.

Cash Reserves

“NMDC’s biggest problem today is logistics, which has affected volumes and kept the stock under pressure,” said Abhisar Jain, an analyst with Centrum Broking Pvt. in Mumbai. “They have a huge scope to increase sales and this pipeline can help them do that.”

Jain is among the 26 analysts who advise buying the stock, according to data compiled by Bloomberg. Of the remaining eight, six recommend holding it, while two have a sell rating. The “strong balance sheet” with as much as $3.9 billion of cash reserves as of March 31, 2012, and improving logistics are the reasons for Jain’s rating, he said.

NMDC has countered the drop in revenue, which slumped in two of the last three financial years, by increasing prices of the commodity by taking advantage of a court-ordered mining ban that hurt rivals including Sesa Goa Ltd., the nation’s largest exporter of iron ore.

Indian authorities cracked down on mining in the states of Goa and Karnataka in 2011 to combat environmental degradation, which forced Sesa to halt production.

Ore Shortage

Supplies marginally improved in October 2011 after the Supreme Court allowed supervised auctions of iron ore lying in stock at the various mines and permitted NMDC to restart mining in September the same year. The company is now allowed to produce as much as 12 million tons from its mines in the region, doubling the output.

“In the past 10 years, hardly any new iron ore mines have come up in India and the bans have affected operations at the existing ones, leading to scarcity for steel mills,” said Gunjan Aggarwal, senior consultant at commodities research firm CRU Group. “Today, miners should be making every effort to produce and sell as much as possible, and this is what the new pipeline will do” for NMDC.

The pipeline project, a joint venture between NMDC and government-controlled Rashtriya Ispat Nigam Ltd., will help the ore miner achieve its plan to raise its evacuation capacity to 42 million tons by March 2015, from the current 29 million tons, Thiagarajan said.

While it may cost more to lay the pipeline along the highways as the price of land may be more expensive, the risk of a Maoist attack is minimized as the rebels usually operate in dense jungles and in the interiors of the country, said Giriraj Daga, an analyst with Nirmal Bang Equities Pvt. in Mumbai, who recommends holding the stock.

Maoist Attacks

“For NMDC, it’s worthwhile, as the company is flush with cash and the pipeline will fetch gains for many years to come,” he said.

The Maoists say they are fighting on behalf of poor villagers and tribal communities whose resources are being exploited to propel India’s economy with few benefits for local people. They have killed more than 9,500 civilians and security personnel since 1998.

The guerrillas in the hinterland, which is rich in minerals such as iron ore, coal, bauxite and manganese, regularly clash with police, target economic infrastructure including railway lines, eliminate alleged informers and extort money from contractors and company officials.

After the second attack on the Essar Steel pipeline, the alloy maker is transporting 4 million tons of iron ore from the state of Chhattisgarh by rail, which meets only half the requirement for its pellet plant, Ganesh Pai, a spokesman, said in an e-mailed response to a query.

“We learnt our lesson from this experience,” said NMDC’s Thiagarajan. “Our pipeline along the highways will be easier to protect.”

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