Aug 23, 2011|
Mining stocks: Going strong
Thanks to the boom in commodity prices, mining companies have become strong investment bets. They have generated huge cash flows, shielding them from slowdown. Profits of mining companies grow faster than price of the mined commodity as operating cost remains virtually the same. Backed by sustained high commodity prices, a company such as Coal India is trading at a valuation of 22 times its earnings per share. In comparison, Sensex is trading at a P/E multiple of 18 times.
Mining companies: strong reserves kitty
This is what the financial numbers have to say...
The most profitable of companies pale in front of mining companies. National Mineral Development Corp.(NTML), MOIL (Formerly Manganese Ore India Ltd.) & Sesa Goa enjoy huge net margins of over 40%. Coal India & Gujarat Mineral Dev. Corp.(GMDC) have been clocking net profit margins of over 15%. Backed by virtually no raw material expense and merely wages and royalty payments forming the cost of operations, mining companies boast of high profit margins in the industry. These companies have been sharing the booty with shareholders through consistent dividend payouts as depicted in the table below.
Riding on fat bottom lines, mining companies are cash-rich. Cash & bank balance constitute more than 60% of the current assets of Coal India, NMDC and MOIL. Armed with huge amount of cash, the working capital requirement of mining companies is negligible. Most of them have large reserves & surplus comprising more than 80% of their net worth. These reserves are essentially used to acquire mining assets. Thus it is not surprising that majority of the mining companies are debt-free and have minimal financing costs. NMDC and MOIL have zero debt on their books. Equipped with a strong balance sheet, mining companies are better equipped to weather a downturn.
* consolidated data
|Net margin (%)
|Cash & Bank balance (Rs.m)
|Cash as % of Current Assets
|Reserves & Surplus (Rs.m)
|Reserves & Surplus as % of networth
|3 yr avg dividend pay-out ratio
Land acquisition is the biggest hurdle in mining operations. Factors such as mandatory environmental clearances and protests from project affected people tend to delay projects. Recently, the mines ministry proposed the Mines and Minerals Development and Regulation bill, 2011 to compensate people displaced by the mining operations. The draft bill provides for 26% profit sharing by coal mining companies and 100% royalty sharing by non-coal companies with project-affected people. This is likely to expedite mining projects, particularly coal projects, which have been languishing for approval.
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