Manganese Ore India Ltd. (MOIL) is India’s largest manganese ore miner based on manganese ore production. In FY10, MOIL produced 1.09mn tonnes of raw manganese ore, accounting for more than ~40% of India's manganese ore production. MOIL’s total manganese ore resources and reserves as per JORC code amount to 69.5mn tonnes and 21.7mn respectively. MOIL has high quality manganese ore reserves. 55% of MOIL’s manganese ore reserves have an average manganese content of above 40%, which is considered high grade; 27.5% of it have an average manganese ore content of between 36.0% and 39.9%; and the rest has an average manganese ore content of not less than 30%. Also, unlike other PSU’s, MOIL enjoys complete autonomy in pricing and gets the full benefit of soaring international manganese ore prices on account of high demand from China (MOIL’s average sales realisation per tonne of manganese ore was `11,709.4 in H1FY11 as compared to `6501.3 in FY08). As ferro alloys cost comprise a miniscule proportion of the total cost of steelmaking, pricing of manganese ore does not invite government interference. Also, most of MOIL’s reserves are deposited in areas with favourable geological and mining conditions and are of regular shape, and its mines benefit from well-developed road and rail infrastructure. This leads to low capex and low extraction cost for MOIL. Strong global manganese ore prices and low operational costs combined have enabled MOIL to earn strong EBITDA margins of above 60%, annual profits between `4.7-`6.7bn and an RoE of above 30% over the last 3 years. With low capex and strong operating cash flows, MOIL has been a zero debt company and accumulated net cash of `17.6bn (cash per share of `104.9) as on 30th September 2010. Its net cash translates into 28% of its market cap at the higher price band of `375. MOIL also has a good dividend paying track record with a consistent dividend payout of 20% over the years.
Going forward, MOIL is likely to grow its earnings and long term value through capacity expansion from existing mines, accretion of reserves through exploration, forward integration into ferro alloys, and cost efficiency improvements. Its large size of manganese ore production and reserves, and having a market share of more than 40% in India makes MOIL well positioned to capitalise on the wide demand-supply gap for manganese ore in India and strong global manganese ore pricing.
At the higher price band of `375, MOIL trades at an annualised P/E and EV/EBITDA of 9.5x and 4.7x FY11E. Net of cash (`104.9/share), the core business is available at 6.4x annualised earnings for FY11. There is no pure play manganese ore domestic peer worthy of comparison. Major global manganese ore players are diversified miners, so wouldn’t be strictly comparable. Other domestic mining companies like NMDC and Coal India trade are trading at 14-17x FY11 earnings. Given the favourable fundamentals of the manganese ore industry in terms of strong global pricing and India’s net importer status, MOIL’s large size in terms of production and reserves, its low capex requirements and low extraction cost and a strong balance sheet, we believe that MOIL’s IPO has been attractively priced. We believe that MOIL is an excellent long term bet on the natural resources sector and should be part of the core portfolio of an investor. We recommend SUBSCRIBE, both from a short and long term perspective, to MOIL’s IPO at the higher price band of `375. There is a retail discount of 5%, i.e. ~`18.75/share as well which makes it even more attractive.
Source : Aditya Birla Money Research Report
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