NMDC Ltd Management Discussions.

1. NMDC: An overview 1.1 Introduction

NMDC, incorporated in 1958, is the largest iron ore mining company in India. With iron-ore production of around 34 million tonnes per annum (MTPA) in FY17, it has a market share of about 25% domestically (excluding captive iron ore production). Average grade of iron ore of NMDC sold in the market is ~64% Fe, which is one of the best globally.

With a Profit (before tax) of Rs.4,293 crores in FY17, it is one of the top profit-making Navratna public sector companies in the country. It has a net worth of Rs. 22,519 crores (as on 31st March, 2017). It has a strong history of rewarding investors with an average dividend payment of over 800% in the last 5 years.

NMDC continues to pursue policies and programmes to deliver long term value to all its stakeholders. NMDC has also invested substantially in the socio-economic development of the local communities, especially near its mining projects.

1.2 Operating Projects

NMDC is operating three highly-mechanised iron ore mine complexes. Two complexes are located in Dantewada (Chhattisgarh) namely Bailadila Iron Ore Mine, Kirandul Complex & Bailadiala Iron Ore Mine, Bacheli Complex with yearly production of around 22 MT. One complex in Donimalai Iron Ore Complex, located in Bellary (Karnataka) produces 12 MT per annum.

NMDC is also operating a diamond mine namely Diamond Mining Project, Panna (M.P.), which is the only mechanized diamond mine in Asia, with yearly production of around 35,000 carats. NMDC also has a sponge iron unit of 200 TPD, at Paloncha (Telangana).

Apart from the above, NMDC has wide presence across the country as shown in the map.

1.3 Global Presence

Spreading its footprint globally, NMDC has a majority stake of 78.56% in Legacy Iron Ore limited, Australia which has iron ore, gold, base metal interests (19 tenements) in Western Australia.

ICVL, a JV company of SAIL, RINL, NTPC, CIL and NMDC acquired a coking/thermal coal mine in Mozambique. Operations were discontinued due to the depressed coking coal prices from December 2015. In view of upswing in the coking coal prices, ICVL is in the process of restarting operations at the Benga Mine.

NMDC is in the process of setting up of a pilot-scale processing plant for gold in its mining lease in Tanzania.

1.4 Growth plan

NMDC has made a comprehensive plan to enhance iron ore production capacity to 67 MTPA by FY22 to meet the growing requirements of iron ore of the Indian Steel sector. The strategy focuses on growth largely through brown field expansion of existing mines and improving evacuation along with it.

Development of a green- field mines (Deposit 13) has also been planned through Joint Venture with the Chhattisgarh State Mining development Corporation.

NMDC is in the process of setting up a slurry pipeline in phases for evacuation of iron ore at economical cost to such locations from where the pellets /ore are made available to industry. Efforts to increase evacuation capacity through doubling of Kirandul-Kothavalasa (KK) line is also in full swing.

NMDC is developing iron ore stockyard in Chhattisgarh for uninterrupted supplies to customers.

For further expansion in capacity, NMDC is pursuing allocation of new iron ore deposits both through participation in auction and reservation through government dispensation route ( section 17A(2A) of the revised MMDR Act, 2015).

Besides, as a part of its diversification and forward integration plan, it is setting up a 3.0 MTPA green field Steel Plant at Nagarnar in Chhattisgarh, which is in advanced stage of construction. It also has forayed in pellet-making with a 1.2 MTPA pellet plant started trial at Donimalai. Another 2 MTPA pellet plant is in the process of being set up at Nagarnar, Chattisgarh.

1.5 Exploration & Reserve Estimation:

NMDC has a dedicated exploration wing at Raipur, which is fully equipped to undertake mineral exploration works. Besides, it has also established a well-equipped Centre for Geostatistics. NMDC has full-fledged mine planning wings at Corporate office as well as at project sites for ore body modelling & reserve estimation, with advance softwares like Surpac, Whittle & Mineshed.

1.6 Research & Development:

NMDC operates a state-of-the-art R&D centre at Hyderabad, which is declared as a "Centre of Excellence" by UNIDO. R&D undertakes various projects related to the operational problems of the units of NMDC, and provide solutions in terms of improvement in the system or change in technology, to achieve continual improvement in its processes & operations. R&D centre also provides solutions to the external agencies.

2. Market Environment: 2.1 Economy: 2.1.1 Global:

Global growth for 2016 is estimated at 3.2 percent, from a level of 3.4 percent in 2015. Going ahead, pick-up in the global growth has been projected to 3.5 percent in 2017 and 3.6 percent in 2018. Economic activity in both advanced economies and emerging & developing economies is forecasted to accelerate in 2017, to 2 percent and 4.6 percent respectively.

Overview of World Economic Outlook Projections

Region/Country Estimate Projections
2015 2016 2017 2018
World 3.4 3.2 3.5 3.6
Advanced Economies 2.1 1.7 2.0 1.9
US 2.6 1.6 2.1 2.1
EU 2.0 1.8 1.9 1.7
Emerging market & developing economies 4.3 4.3 4.6 4.8
China 6.9 6.7 6.7 6.4
India (fiscal year basis) 8.0 7.1 7.2 7.7

2.1.2 India

India has emerged as the worlds fastest economy, with policies and reforms by the Government supporting higher growth. Prudent fiscal regime and calibrated monetary policy has reigned in inflation and strengthened macro-economic stability. Lower crude oil prices globally have also helped Indian economy reduce current account deficit and boost the overall economy of the country.

Indias economy is estimated to grow by 7.1% in FY 2016-17 as per Central Statistics Office (CSO) from 7.9% recorded in the previous financial year. The growth momentum of the Indian economy is expected to rise with measures by the Government in areas such as, taxation (Goods & Service Tax), ease of doing business, Foreign Direct Investment (FDI) reforms, etc. Another major factor helping Indias economy is the expected lower global oil prices, which has a significant impact on the countrys import bill, improving fiscal condition.

The thrust of Government of India to enhance spending on infrastructure augurs well for the Steel industry and thereby, the iron ore sector.

2.2 Iron Ore Industry Outlook:

Global:

The steel industry witnessed a major growth cycle in the last two decades, driven by Chinas growth. It, in-turn, stimulated a massive increase in global iron ore production, more than doubling from 950 million tonnes per annum (Mtpa) in 2000 to over 2200 Mtpa in 2016. These market fundamentals incentivized new iron ore producers to enter the industry, and encouraged existing players to expand their operations, to meet this unprecedented demand. However, the iron ore industry is currently passing through a phase where supply is exceeding demand globally and this surplus scenario is likely to continue in the coming years. As a result, the prices of iron ore have come down in the recent past and are likely to remain subdued in the near future.

Top-5 iron ore producing countries (usable ore basis)

2015 2016
Australia 817 825
Brazil 397 391
China* 375 353
India 156 160
Russia 101 100
World Total (rounded) 2,280 2,230
Source: USGS

Global iron ore production increased to 2.28 billion tonnes (usable ore basis) in 2016, up from 2.23 billion tonnes in 2015. Australia continued to be highest producer with an estimated production of 825 million tonnes in 2016. India was the fourth largest iron ore producer.

Defying market expectations, average price of iron ore (62% Fe CFR China) at USD 58t/t in 2016 was higher than the corresponding figure of USD 55/t in 2015. In H1 2017 too, average price at $75/t has remained robust on account of record production of crude steel, especially in China, leading to increased demand of iron ore.

Going ahead, however, demand and prices are likely to come under pressure with expectation of Chinese steel production stagnating and competition from scrap as a feedstock.

India:

Production of Iron Ore in India at 190 MT in FY17 was 22% higher than FY16. Exports from the country also increased to 24 MT during the year, which was 4 times than FY16. Most of the export from India was to China of low grade ore (58% Fe and below), which has lower export duty of 10%.

Indian iron ore production is likely to grow in line with domestic steel production. Going forward, domestic supplies are likely to grow substantially till 2020 as non-captive miners, with their leases expiring by 2020 (as per MMDR Amendment Act, 2015), are likely to maximize production.

Indias Iron Ore reserves and resource

Reserves/Resource Reserves (MT) % of total Resource (MT) % of total Total (MT)
Hematite (01.04.2013) 6607 32.11% 13969 67.89% 20576
Magnetite (--do--) 35 0.30% 10713 99.70% 10747
6642 24682 31323

NMDC is bullish on the growth prospects of Indias steel industry with its competitive advantages and the impetus being given by the government to the steel sector. The recently published National Steel Policy 2017 aims to achieve a steel production capacity of 300 mtpa by 2030-31, on the back of envisaged growth in domestic steel demand in all key sectors, such as, infrastructure, housing, automobile, etc. It is on account of this growth potential that Indias steel industry is being viewed as a bright spot globally. Low per capita steel consumption in the country at 63 kg/t vis--vis the world average of 208 kg/t also indicates the huge growth potential of the Indian steel industry.

Salient features of National Steel Policy, 2017

Aspires to achieve 300MTPA of steel making capacity, with additional investment of Rs.10 lakh crores by 2030-31.

Seeks to increase per capita steel consumption to the level of 160 Kgs by 2030-31 from existing level of around 60 Kg.

Facilitate setting up of SPVs in mineral rich states of Odisha, Chhattisgarh, Jharkhand and Karnataka, for optimal growth.

Iron Ore and Coking coal requirement of 437 MTPA and 161 MTPA respectively has been projected by 2030-31.

Greater emphasis on time-bound development of iron ore blocks in the country.

Coking coal import has been envisaged to be brought down from the existing 85% to 65%.

3. NMDC - Opportunities & Threats a) Opportunities

i) Envisaged growth in domestic steel production on account of factors mentioned below would lead to higher demand of Iron Ore in the country:

Growth in steel intensive sectors such as housing, infrastructure, automotive, consumer durables in the coming years.

Growing urbanization of the Indian economy coupled with rising income levels of the burgeoning Indian middle class.

Government initiatives such as Make-in-India, Freight corridors, 100 Smart cities, Rural electrification and Housing for all by 2022.

Continuous thrust by the government to use domestically manufactured iron and steel products in government procurement.

Restrictions on steel imports in the country on account of measures being taken by Govt. of India such as anti- dumping duty, MIP etc. would also help domestic steel production to rise. ii) Grow business through Special Purpose Vehicles (SPVs) envisaged in mineral rich states. Play an important role in both the Steel and Mining SPVs being set up in these states. iii) Acquisition of Strategic and critical mineral assets based on business potential and national interest.

iv) NMDC being one of the agencies nominated to undertake exploration activities is investing to intensify exploration for mapping of minerals across the country, which could open new avenues for the Company to grow.

b) Threats

i) Quantum jump of production of merchant miners in the country, particularly Odisha, may lead to oversupply situation in the near term.

ii) Backward integration by Steelmakers into iron ore mining through auction route will significantly shrink the market of the Company.

iii) Indian iron ore industry will continue to be uncompetitive on a global level due to higher rates of royalty and other levies such as DMF, NMET, Export duty etc. as well as significantly higher logistic costs.

iv) Increasing regulatory pressure on environment, safety and sustainability.

v) Disturbances due to Maoist activities in Bailadila region from where majority of NMDCs production comes.

vi) NMDC may be affected by government actions, including the imposition of tariffs and duties, speculative trades, regulatory issues arising due to judicial verdicts, the development of products substitutes or replacements, recycling practices, an increase in capacity or an oversupply of the companys products in its main markets.

vii) Huge surplus steel capacity in most regions including China will continue to exert downward pressure on steel prices and thereby iron ore prices.

viii) Lowering of the global iron ore prices coupled with low seaborne freight rates have made imports competitive for coastal based plants particularly on west-coast.

It would be pertinent to note that iron ore mining industry in India is expected to witness enhanced competition over the next few years. On the one hand, domestic iron ore production is on the rise, with production increasing by over 20% in the last two financial years (Iron ore production in India including captive: FY17- 190 MT; FY16-155 MT) and this trend is likely to continue in the near term. On the other hand, the threat of higher iron ore imports looms large, especially on the west coast, with lower global prices and lower seaborne freight rates. Additionally, with domestic steelmakers now having the option to integrate backwards with acquisition of iron ore mines through auction route under MMDR Amendment Act 2015, the market for merchant miners may be affected adversely in the medium to long-term.

NMDCs business would continue to be affected by developments impacting the demand-supply scenario of iron ore in both the global and domestic markets.

4. Physical and Financial performance 4.1 Physical Performance of NMDC

Details 2012-13 2013-14 2014-15 2015-16 2016-17
Production:
Production of Iron Ore WMT 271.84 300.25 304.41 285.74 340.05
(In lakh tonnes)
Production of Sponge Iron
(tonnes)* 36,289.00 29,734.00 28,993.96 6,614.26 5,474.11
Production of Diamonds
(carats) 31,533.39 37,081.70 35,085.46 35,558.31 35,635.99
Sales:
Sale of Iron Ore (in lakh tonnes) 262.74 305.00 305.16 288.39 356.21
Sale of Diamonds (carats) 17,862.57 43,487.63 38,788.58 36,682.93 25,631.46
Sale of Sponge Iron (tonnes) 37,599.54 30,572.34 25,191.38 8,364.52 8,579.42

4.2 Financial Performance of NMDC

(Rs. in Crore)

Details 2012-13 2013-14 2014-15 2015-16 2016-17
Sale of Iron Ore 10,558.71 11,899.52 12,197.69 6,327.93 8,708.90
Sale of Diamonds 28.51 49.85 50.06 52.61 41.91
Sale of Wind Power - 1.05 5.96 6.30 7.48
Sale of Sponge Iron 73.50 56.01 48.09 13.14 13.13
Sales - Others 43.55 51.77 54.62 57.29 58.22
Turnover 10,704.27 12,058.20 12,356.41 6,457.27 8,829.64
EBITDA 9,616.84 9,865.98 9,930.07 4,374.21 4,509.86
PBT 9,465.12 9,759.20 9,767.84 4,092.76 4,293.68
PAT 6,342.37 6,420.08 6,422.00 2,712.22 2,589.14
Dividend 2,775.30 3,370.01 3,390.00 4,361.19 1,313.02
Dividend as % of PAT 44% 52% 53% 161% 51%

5. Discussion on financial performance with respect to operational performance

During the year under review, the Companys revenue from operations increased by 37% from Rs 6,457 crores to Rs 8,830 crores mainly on account of:

Increase in Sales quantity by 24% from 288 Lakh Tons to 356 Lakh Tons.

Realization was higher by 11% during this period from Rs 2,194/- per ton to Rs 2,444/- per ton.

Though there is a fall in other income which is mainly due to the reduction in Bank deposits on account of Buyback of Rs 7,528 crores in the month of Sep 2016 resulting in reduction of interest income and also on account of fall in interest rates, the positive impact of Share Buyback on Earning Per Share is visible due to this capital restructuring.

There is an improvement in EBITDA even after making the provisions on account of Service Tax on Royalty for Rs 158.60 crores, enhanced Mine Closure Obligations for Rs.258.66 crores, provision of Wage revision of employees which is due from 01st Jan 2017 and provision for revision in amount of gratuity for enhanced entitlement in line with the recommendations of the committee so constituted by the Government.

Details on financial performance with respect to operational performance are given in detail in the Directors Report.

6. Outlook for NMDC

NMDC proposes to augment its production capacity of iron ore to 67 million tonnes by 2021-22. It has also embarked on value addition projects by setting up pelletization plants by utilizing slimes and 3.0 MTPA integrated steel plant in Chhattisgarh.

Government of India has charted a road map to augment Indias Steel production capacity to 300 Mtpa by 2030-31. To fulfill this vision, NMDC proposes to act as a facilitator and developer of green field steel plants by creating Special Purpose Vehicles (SPVs) in the mineral rich states of Jharkhand, Karnataka and Chhattisgarh.

NMDC also proposes to invest in strategic and critical raw materials which are required by our nation for long term supply security. In line with this strategy, NMDC has entered into MoUs with MIDHANI & DMRL to explore opportunities for investment in Tungsten mineral assets in India and abroad.

NMDC is committed to focus on maintaining cost competitiveness in global and domestic market in a scenario where prices are expected to remain subdued.

Along with robust strategic planning to support its growth agenda, NMDC continues to enhance organizational capabilities and other enablers to achieve its short-term and long-term objectives.

7. Risks and Concerns

NMDC is exposed to sharp fluctuations in demand for its products and volatility in prices. Weaker commodity price outlook would continue to impact NMDC over the next few years till the global and domestic markets recover.

MM(D&R) Amendment Act, 2015 poses increased risks for NMDC as its major customers now have the option to acquire captive mines in mineral rich states. Two of NMDCs major customers have already acquired iron ore mines in the state of Odisha and Karnataka through auction route. More auctions of iron ore mines are likely to come up in the near future for the end-users. This is likely to adversely impact the market for NMDC over the medium to long term.

One of the major risks that NMDC is facing is the disturbances due to Maoist activities in Bailadila region. The Company is in contact with the Government agencies at all levels for support and protection of its employees and installations. The initiatives taken by the Government of Chhattisgarh and the Central Government are expected to find a solution to the risk at the earliest.

Timely enhancement of evacuation capacity in line with production plans also remains a potential risk. This could impact production and inventory levels for NMDC.

8. Internal control systems and their adequacy

NMDC has put in place all the necessary internal control systems. Necessary disclosure in respect of Internal Control Systems and their adequacy has been made in Annexure-C to the Independent Auditors Report dated 11.07.2017 which forms part of the Annual Report.

9. Material developments in Human Resources/ Industrial Relations front, including number of people employed.

Human capital of NMDC has been its key driving factor and its greatest asset. The company has made concerted efforts in keeping the workforce highly engaged and motivated. On one hand, continuous improvement is made to improve the quality of life at the townships with investments in parks, community halls, upgradation/construction of new quarters, clubs, gymnasium, facilities for different sports such as tennis, badminton, table-tennis, cricket, etc. On the other, training and skill upgradation forms an important area where first assessment is made to understand employee needs and concerns and then, appropriate training programmes are organized throughout the year. As a result of the all-round measures being taken by the company, attrition from NMDC has been marginal, in spite of remote locations of the NMDC mines.

It is worth highlighting that industrial relations have been cordial all along during the year. Any difference is sorted out through bipartite discussions at appropriate fora. The cooperation and support of workmen represented by All India NMDC Workers Federation (AINMDCWF) in this regard is praiseworthy.

Keeping in view the various diversification projects viz. Steel Plant and Pellet Plant, the company has taken initiative to train /retrain its existing manpower and also to go for fresh induction. More than 200 Executive Trainees joined in 2016 - 17 and were provided on-the- job and off-the-job training in order to prepare them for taking up the challenges of working in NMDCs production projects, upcoming Steel Plant as well as any new venture that Company may like to take up.

During the last five years, the number of people on rolls as on 31st March is as follows:

2012-13 : 5,777
2013-14 : 5,664
2014-15 : 5,490
2015-16 : 5,773
2016-17 : 5,572

10. Sustainability

NMDC has invested in Sustainability right since its inception. It is on this account that NMDC has been able to create a favourable business environment in the areas it operates and has developed a strong local understanding of community concerns and local sensitivities. NMDCs efforts in sustainability have been rewarded with 5-star rating to three of its mechanized mines.

The four major pillars of Sustainability on which NMDC focuses on are environment, health, safety & society.

10.1 Environment:

The Company is organizing monitoring studies covering all environmental parameters by recognized laboratories. All environmental parameters continued to be well within the limits in FY17 as per the studies carried out. Continuous Ambient Air Quality Monitoring Stations have been installed at Bacheli project (2 no.s) and Kirandul project (1 no) for recording of Ambient air quality parameters such as PM10, PM2.5, SO2, NOx and CO in real time.

Carbon footprint studies were conducted in 2016-17 and Green-House Gas emissions have been disclosed in Carbon disclosure project.

A reputed agency like FIMI, New Delhi has been engaged this year to carry out Sustainable Mining Audit for iron ore mines located at Bacheli and Kirandul.

During 2016-17, Water Audit was also carried out at all projects of NMDC and recommendations of audit are under implementation by projects to conserve water and to improve the efficiency of motors / pumps, arrest leakages, etc.

The Company is undertaking environmental pollution control work such as de-silting of check dams / check bunds, tailing dams, construction of buttress walls at toe of waste dumps and geo-coir matting on waste rock dumps for stabilization of dumps.

About 90 wells are being monitored at NMDC projects to monitor underground water level, which also covers the quality analysis in all 4-seasons of the year. Studies have revealed that there has been an increasing trend in the ground water due to hydraulic loading by the existing check dams and check bunds. Limited usage of ground water and continuous recharge has also helped in the process.

Bio-diversity conservation of Bailadila Iron Ore Mines has been taken up as thrust area and NMDC has contributed Rs.28.15 crore to Compensatory Afforestation Fund Management and Planning Authority account (CAMPA) for implementation through the Forest Department.

To enhance the green cover in the region, NMDC has contributed Rs. 25 Cr during this year to Hariyar Kosh for undertaking block plantation in the State of Chhattisgarh.

To ensure environmentally safer treated waste water from households in township, NMDC has set-up Sewage Treatment Plant with advanced technology (Sequential Batch Reactor) at Bacheli (2 MLD). Work is in progress at Kirandul (3 MLD) & Donimalai (3 MLD) townships.

10.2 Health & Safety

Health & Safety continue to be our priority with employees & contract workers at our projects adhering to the SOPs & safety norms. NMDC appreciate that safety is a journey & is committed to continually improve its performance & set high standards.

NMDC provides extensive safety training programmes to inculcate safety habits & mindset at work to its employees. In order to ensure that safety systems are upto date & also comply with the latest safety regulations, a cross-project internal safety audit has been started in NMDC. NMDC also gives thrust on improved safety performance through focus on Risk assessment studies, Multi disciplinary audit of projects, periodic safety inspections, Training etc. Our safety records are testimony to NMDCs effort in this regard.

NMDCs Safety Aspects

No NMDC fatality in last 5 years

Severity rate came down to 0.20 in 2016-17 from 0.34 in 2015-16 (SR=Mandays lost per 1000 mandays worked).

NMDC strives to ensure that workers are not exposed to occupational hazards that negatively affect their health. NMDC also has well equipped hospitals with capable medical teams available 24/7 to support the health & well being of the workers & the broader community. Occupational health doctors are regularly sent for training to update their knowledge.

10.3 Corporate Social Responsibility

CSR is raison dtre of NMDC and not just a part of business strategy. NMDCs CSR programmes are carried out in areas which are remote, backward and face serious law and order problems due to left-wing extremism. The area is among the most backward regions of India and inhabited predominantly by Scheduled Tribes and Scheduled caste population who are poor, underprivileged, deprived, suffer malnutrition and devoid of support for their socio-economic needs. It is only because of its strong focus on social responsibility programmes aiming at enhancing the quality of life of the local communities that NMDC has been successfully mining in these areas.

NMDC is the model PSE in the field of CSR and its model of stakeholder consultation mechanism for implementation of its CSR has been recommended by Department of Public Enterprises, Government of India for emulation by all other CPSEs.

The Company is investing substantially in developing social infrastructure such as educational institutes, sanitation, healthcare, drinking water, infrastructure development and employable skill development, integrated village development, etc. primarily in peripheral areas of its operations.