>GMDC

Impressive growth-oriented mining company
We (Centrum) met with Mr. A.L. Thakor, GM-Lignite in Ahmedabad and discussed the future prospects of GMDC in detail. We were impressed with the volume growth story of the company with industry beating steady volume CAGR (well above 10 percent), flexibility in taking lignite price hikes unlike other mining majors (esp Coal India), outsourcing-based cost model and lower overall employee cost with no wage hike overhang, impressive growth prospects in bauxite and attractive valuations. Please see the main contours of our discussion on various divisions:-


Lignite Division
Volumes - Lignite volumes are expected to grow by ~15pct in FY13E to 13MT and then reach 14.5MT in FY14E. The growth in production is expected to come mainly from Bhavnagar and Mata no Madh mines.


The company also expects to open 6 new mines (3 in Kutch district and 3 in South Gujarat) in the next 3 years after getting all approvals resulting in an increase in capacity by 5-6 MT by FY15E. GMDC expects volume growth CAGR to remain well above 10% for the next several years based on current visibility of projects. We remain impressed with the volume growth story of the company.

Pricing - GMDC expects to hike prices for lignite in Q2FY13E. It will take into account coal India's F grade coal prices, import landed cost of coal and domestic coal prices for non-power sector into account for deciding on lignite prices. The company indicated that unlike in coal, price hikes in lignite (done by GMDC) are not resisted by either its customers or the regulatory authorities. We see this as a major positive for the company.
 
Beneficiation (Value addition) - GMDC has undertaken beneficiation trial for 1.5MT of lignite at its Bhavnagar mine and the project is expected to start operations from Q1FY14E. There is no capex involved as the project is completely outsourced to a third party vendor. The cost of beneficiation would be ~Rs150/tonne and GMDC expects to increase the calorific value of lignite by ~1000Kcal/Kg which would result in an increase in realizations of ~Rs400/tonne, leading to net value addition of Rs250/tonne. Also, around 2-3% of rejects generated would fetch ~Rs20000/tonne. The company has indicated that this was done for the first time on a trial basis to improve the quality of lignite and produce an environment friendly fuel. GMDC indicated that if this model proves successful at Bhavnagar, it could be implemented
across all projects in the next few years to enhance revenue and quality of lignite produced by GMDC. If successful, we see this as a major revenue enhancing opportunity for GMDC (addtional 20-25% revenue on beneficiated lignite) in the coming years from existing mines without any capex.


Bauxite Division
Volumes - Bauxite division is expected to witness higher volumes going forward and the company expects ~1.5 MT of bauxite production in FY13E, up from 0.9 MT in FY12. Bauxite calcination would not be undertaken and bauxite would be sold in the open market where demand remains robust.
 
Pricing - GMDC expects bauxite realizations of ~Rs850/tonne and the cost of mining is ~Rs400-450/tonne. JV with NALCO - GMDC has a JV with NALCO for setting up a 1 mtpa alumina plant in Gujarat. GMDC’s equity share is 26% and its investment would be ~Rs3400mn, out of which cash portion would be Rs1700mn (financed through internal accruals) and the rest would be invested through bauxite supply in the initial period. GMDC will supply 3 mtpa bauxite for the project at market prices and would be able to enjoy ~40% operating margins. In addition, GMDC would be able to get its share of profits (26%) from alumina sale on the project.


Power Division
50 MW power plant (Nani Chher) - Company's 50 MW captive power plant at Nani Chher is operating at 50% PLF and GMDC is looking to outsource the operations of the plant to A third party vendor. COP is expected at Rs1.8/unit under the outsourcing model and long term PPA stands at Rs2.25/unit for the power plant.


Wind Power - GMDC is setting up an additional 50 MW wind power capacity at a capex of Rs3bn (financed through internal accruals) and this is expected to be commissioned in H2FY13E.


Other Operational highlights
Employee cost is expected to come down in FY13E as the company expects reduction in workforce by ~150 employees (~8% of total workforce of 1900). Around 50 employees are expected to retire and another 100 are expected to take VRS in FY13E. Next wage revision is due only after 4 years and so no wage cost inflation overhang exists with GMDC.

GMDC is doubling its flourspar production capacity at a capex of ~Rs120mn. Production expected in FY13E/14E is 30000/40000 tonne.


RISH TRADER