MUMBAI (NewsRise) -- NMDC, India's biggest iron-ore miner, is facing a major risk to its business model after a southern state decided to revoke the lease granted for a mine.
The state of Karnataka withdrew the approval it had earlier given to the mine at Donimalai and has instead decided to auction the block, NMDC said in a statement late Tuesday. The government-owned company said it has asked the state to retract the withdrawal notice.
Analysts warn the Karnataka government move will deal a blow to NMDC's growth prospects as it will have to pay a hefty premium if it were to participate in an auction. The setback pushed NMDC shares down as much as 4.5% to their lowest in almost three-and-a-half years in Mumbai trading on Wednesday. The shares closed 4.3% lower, while the benchmark S&P BSE Sensex lost 0.7%.
The mine at Donimalai has a capacity of seven million tons. It was expected to contribute 0.5 million ton per month to NMDC's sales, had it received all approvals to restart operations. ICICI Direct Research cut NMDC's sales volume target to 32 million tons for both fiscal year 2020 and 2021 from 35.5 million tons and 37 million tons, respectively.
Karnataka had, in November, approved the renewal of lease for NMDC to operate the iron ore mine at Donimalai for 20 years by charging an 80% premium on the ore sales. NMDC challenged the state government's demand, saying such a charge was not part of the earlier license. According to a Reuters report, NMDC will lose as much as 10 billion rupees ($139 million), or almost 10% of its annual revenue, if the state levied such a huge premium.
The company sued the state in a lower court and won an order in its favor. In the order, the court has reportedly remarked that the state government can cancel the mining lease, if allowed under the law, to achieve the objective of enhancing its revenue.
Last week, NMDC said it is in the process of getting approvals to restart operations of the mine.
"While we had expected a long process, lease cancellation comes as a surprise," brokerage Citigroup said in a report on Wednesday. According to Citigroup, Donimalai accounted for 6 million tons, or 17% of NMDC's volumes, in fiscal year 2018.
Karnataka's move has triggered fears of other states taking similar steps. The company has four mines in the central Indian state of Chhattisgarh, which are due for renewal in March 2020.
"We believe that with this move, there is a question mark on the business model of all public-sector mining companies," brokerage Emkay said in a report. This will not only impact NMDC, but may also affect other state-run companies that have captive mineral blocks that could be offered in online auctions as and when they are due for renewal, the brokerage warned.
NMDC has also filed a revision petition against Karnataka with the federal government's mine ministry, which has the powers to revise the orders made by the state on matters other than minor minerals.
--Dhanya Ann Thoppil