The Indian Government is set to Divest another State Owned Commodity Company Manganese Ore (MOIL) through an IPO as part of its yearly plan to raise around $9 Billion.Coal India,India’s largest Miner and the world’s largest Coal Producing Company was an unparalleled success due to its great fundamentals and cheap pricing.The Indian Government will be trying to build on that success as it sells around 20% stake in this Manganese Pure Play along with a couple of State Governments.MOIL will raise around Rs 1500 crore ( $330 mm) for the government giving it an approximate market cap of  $1.65 billion.MOIL looks decently priced and will give a further discount of 5% to retail investors whose quota has been doubled to Rs 2 lakh ($4200) from the earlier Rs 1 lakh.While the Final Pricing will be known later,here is an analysis of the fundamentals of MOIL.

Facts about the Manganese Industry

1) Manganese Reserves – Manganese Reserves are quite abundant with Mn estimated to be the 12 most abundant element on Earth.Reserves are estimated to be 5.2 billion tons with 75% of Reserves found in South Africa.Other major countries are Australia,India,Ukraine,China,Brazil.

2) Major Manganese Producers – The Major Manganese Producing Companies are BHP,Vale,ENRC,Assmang,MOIL.BHP is the world’s largest producer with 4.5 million tons.World Production was around 38 million tons in 2009 which fell by 8% in 2010.Manganese Alloys are mainly produced in China which accounts for 47% of the production mainly because of the large industry.

Advantages of MOIL

1) Largest Indian Manganese Producer – MOIL is the largest Mn Producer in India with around 1.1 million tons in 2010.The Company is planning to increase production by around 10% each year to reach 1.5 million tons by 2014.The 69 million tons of reserves that the company has is of high grade ores.The Company accounts for around 50% of the Mn production in India

2) Excellent Financial – The Company has reported 45-49% Net Margin in the last 3 years,the period in which the Steel Industry witnessed a sharp downturn.The Company has no debt and more than $400 million in cash.The Company generates high EBITDA and high cash flows as well

3) Forward Integration – The Company has set up JV with Indian Steel PSUs to set up value added manganese alloys production for the Steel Industry.The Company also has manganese benefaction manufacturing at 2 of its mines.The Company is also looking to expand Manganese Exploration in the state of  Maharashtra.

4) India Demand – Indian Steel Industry is growing rapidly due to the fast growing economy with Steel Production expected to double to 125 million tons by 2015.It provides a strong demand for Mn Ore whose growth in India is expected to be around 9% per annual.Note Indian Mn Production is somewhat insulated from world demand-supply imbalances due to strong secular growth.There are restrictions on exports of Mn ore as India is a importer of this ore.

Risks with MOIL

1) Regulatory Risk – “The Mines and Minerals (Development and Regulation) Bill, 2010 has been proposed to replace the
Mines and Mineral Development and Regulation Act, 1957 which may adversely affect our results of
operations and financial position.”This Bill proposes to give away 26% of the profit of a mine to the local community.There are various proposals being floated so the final version is unkown till now.However impact on government mines should be less in my view than private ones.

2) Cyclical Industry – 90% of Manganese Demand comes from the Steel Industry which makes Manganese levered to the cycle of the Steel Industry.During the downturn in 2008,Manganese Prices fell by almost half as Steel Prices and consequently Manganese Demand Crashed.

3) Geographical Concentration – The Company operates 10 mines with 69 million tons of  reserves in 2 Indian states of Madhya Pradesh and Maharashtra (will continue to own 3-4% post IPO) which makes the operations of the company concentrated geographically.

Valuation

MOIL has a Net Worth of Rs 1860 crores and a NAV of around Rs 110/share.The Company will probably earn around Rs 700 crore this fiscal year after doing Rs 465 crores last year (which was a bad year for the industry).Operating Cash Flow has been generally higher than the Net Profit leading to improved cash position over the last 4 years.The Capital Requirements of the Business is quite low leading to high Return Metrics.If the Government sells the 20% stake at Rs 1500 crore that would give the company a market cap of Rs 7500 crore.Taking out the Rs 1700 crore in cash would make the company be valued at 3.2x BV and 8-9x P/E.This is a sharp discount to Global Mining Companies.

Summary

Like Coal India Limited,MOIL looks like a very safe commodity investment at a cheap valuation.With growing Indian Demand,MOIL can hardly miss continuing on a  steady 10-15% earnings growth over the next 4-5 years.If the commodity prices flare up again like 2008 due to QE2,then MOIL provides a big upside as well.Its a good investment for investors looking to invest in safe mining plays.With government ownership,the typical Indian management risk is also greatly mitigated.