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Mining stocks: Going strong

Aug 23, 2011

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.

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.

Mining companies: strong reserves kitty
  Coal India*
FY11
GMDC
FY10
NMDC
FY10
Sesa Goa*
FY11
MOIL
FY10
Operating margin(%) 29.20 48.60 84.60 54.90 75.90
Net margin (%) 17.40 26.30 55.30 41.40 48.30
Cash & Bank balance (Rs.m) 458,623 958 128,549 8970 14,870
Cash as % of Current Assets 71.20 6.50 64.40 12 85.30
Reserves & Surplus (Rs.m) 286,222 13,419 138,759 127,235 15,094
Reserves & Surplus as % of networth 81.90 95.50 97.20 99 89.90
Debt/Equity 0.04 0.16 0 0.08 0
3 yr avg dividend pay-out ratio 42.60 22.60 18.60 8.80 20.10
* consolidated data

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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2 Responses to "Mining stocks: Going strong"

R.Radhakrishnan

Aug 24, 2011

An excellent report, which seems to satisfy some investment criteria. Further, you have brought out these facts, which have not been highlighted by any other experts in our business channels. However, a concluding paragraph expressing your view about their prospects for investment would have added value to your subscribers because your views are valuable.

Like 

Sachin Rao

Aug 23, 2011

Lately i have provided comments to many of your articles. There have been no response. Problem is how do we track this request response. Whereas you have provided a window to provide response, there is no way to track that out again. From your end your end, response from your end is not sure and if it is responded it is not convincing....

Now this above report, what call should I take. Should I buy hold sell???

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