Despite the country being a known repository of a wide range of minerals, it has the distinction of being the least explored resource nation. Lack of funding and under developed expertise have throttled exploration to a major extent. While there has been a boom in FDI inflows in sectors like financial services, communication, retail and wholesale trade, the mining sector has actually seen a slump in foreign investment during the last five years. This is a disturbing trend over the last few years as despite the enormous wealth of mineral deposits, the country has become a net importer of iron ore and cheap steel products. Hence, the National Mineral Policy should be implemented on a war footing to correct the import-export anomalies, plus incentivise large FDI investment in commercial mining activities. Iron ore prices have been on a tear recently due to many factors. Firstly, the challenging risk of environment in 2018 left most of asset prices finishing the year in the red. This allowed investors to enter 2019 in those commodities which have a high beta to global markets and specifically to Chinese economy activity. Secondly, to ease the burden of US tariffs and support their slowing economy, China has turned on its stimulus levers to increase funding for their infra and construction projects. Iron ore prices are highly correlated to Chinese economic indicators such as real estate and steel. Thirdly, inventories of iron ore are on pace to fall to their five-year lows in the near future. India is the world’s largest producer of sponge iron, most of which is produced primarily through the coal based method of production. Growth in the sponge iron production can be attributed largely to the popularity of secondary steelmaking, which has shown a phenomenal growth in India. The process of sponge iron manufacturing involves removal of oxygen from iron ore, turning it porous to resemble a honeycomb like structure, which looks spongy in texture. Hence the name sponge iron. Tata Sponge Iron Ltd is a subsidiary of Tata Steel Ltd and producing high-grade sponge iron in the country. The company is planning to raise Rs 1,650 crore through a Rights issue in July 2019, while the market cap is around Rs 1,000 crore. This signals an aggressive expansion plan for the company. Financials have been decent for Tata Sponge Iron Ltd, as even though being in the capital intensive business, the return on equity have been around 15 plus totally debt free. Historically, it has been trading at around 15 times its P/E ratio in the last few years, but currently with the stock at Rs 636, the ratio works out to around 8. Analysts expect the Tata Iron stock to appreciate by 30% in the next 15 months.
Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.