FA LONG
NSL Consolidated (ASX:NSL)
TRADING HALT: Receipt of initial commercial purchase order HALT ENDS: No later than the commencement of trading on Tuesday 14th February 2017.
Through the company's subsidiary, NSL Mining Resources India Private Limited, NSL own and operate several large low grade iron ore mines in the South Indian state of Andhra Pradesh. Andhra Pradesh is the fastest growing Southern state in India and was the top ranked state in India by the World Bank for ease of doing business in 2016.
Andhra Pradesh recently hosted the CII Partnership Summit 2017 in Vizag, with attendance of over 200 delegates from 50 countries, resulting in the signing of 665 Memorandum of Understandings with foreign companies to substantially increase FDI. NSL have a close working relationship with the current leader of Andhra Pradesh, the Honourable Chief Minister, Nara Chandrababu Naidu, who has personally met with CEO Cedric Goode on several occasions and has been present for several MoU signings between the company and state government organisations.
The company themselves have been in India for upwards of eight years, learning the ins and outs of doing business, in a country that operates nothing like Australia. With that said, NSL is proud to be the only foreign company to own and operate iron ore mines in India and has come a long way since their original venture into the country.
Andhra Pradesh has an abundance of low grade iron ore deposits, making the recently commissioned and optimised wet beneficiation plant the perfect money making machine for the company. The company operate out of the Kurnool District, which I often call the Pilbara of India. Cedric has previously indicated to shareholders that the company has no intention of ever leaving Andhra Pradesh, as the dirt there is just so good.
As the state and country continue to grow, local steel demand is expected by many to continue to grow on the back of infrastructure growth and large amounts of FDI flowing in as the world looks to the "next China".
Last year, NSL were approached by the Wei Hua Group, a multibillion dollar Chinese company to form a joint venture for the construction and operation of a steel plant in the Orvakal Mega Industrial Hub, a large industrial area being built a mere 30km from NSL's current operations.
NSL are to receive a 50% free carry in the venture in exchange for arranging the land, approvals, construction and the operation of the mill. Wei Hua have already purchased a large portion of the blast furnace, but have likely had to look abroad as the Chinese government have banned any further expansion of steel production capacity and encouraged companies to look at taking their operations overseas closer to the source of demand.
The company recently advised that the state government had formally allotted 250 acres to the company for the creation of a pellet plant, and an additional 750 acres for an integrated steel plant, further adding confidence to the joint venture proceeding with Wei Hua. The size of the plant is still unknown, but previous allocations of land within the state, indicate a potential steel plant size upwards of 1mtpa of steel product.
NSL currently has a nameplate 200ktpa dry beneficiation plant, capable of producing ore up to grades of around 58% Fe. As demand for this lower quality ore was not sufficient in the region, the company chose to feed the ore into their newly commissioned nameplate 200ktpa wet beneficiation plant. It is my understanding that this can easily be separated into 400ktpa if a market for some of the lower grade material eventuates.
Recent optimisation of the newly commissioned wet plant has resulted in grades as high as 65.3% Fe, using waste product as low as 14% Fe feedstock. This highly exceeded company expectations as per their announcement.
In addition, the company have identified that due to the low contaminants within the feedstock (I believe possibly lower phosphorus, silica and alumina contents) the produced product is considered to be "premium" quality and can be fed into the production line of local steel mills at a later stage. This saves the steel mills money on processing and subsequently will allow NSL to gain a higher price for their product.
The company have estimated an operating cost of approximately A$22 per tonne, with a sale price in excess of A$52 and are in the process of hiring staff to transition into a full time operation this month. Tuesday will likely reveal the sale price currently achievable in the region. Many holders are speculating upwards of A$66 per tonne but it is purely speculation at this point. The company have two existing 200kt non-exclusive offtake agreements for their wet beneficiated ore, with both BMM Ispat and JSW Steel.
They are currently debt free, with approximately A$4 million in cash and have already paid off the majority of their current plants. The company have been working with the manufacturer of their plants, Chinese company Huate Magnetism, and METS on future improvements to reduce capex on their plants as they move to ramp up to 2.5mtpa by the end of 2019, and 8mtpa by the end of 2021 as per their MoU with the state government.
These expansions are reportedly based entirely on utilising cash flow, no finance required. These targets may well eventuate quicker as the state government have requested the company to speed up expansion as much as possible and finance theoretically shouldn't be hard to acquire once cash flow eventuates and becomes frequent.
Chief Minister Naidu has also instructed NSL to assist with making a steel mill in the Kadapa District a reality, which could potentially offer further demand for both the company's iron ore and/or result in an additional joint venture for the construction of a steel mill.
So as you can see, the company has enormous upside potential and have a very established and reliable relationship with a state government determined to improve FDI, transparency and ensure that Andhra Pradesh succeeds in becoming the "Gateway to the East".
Management ensured they organised the company structure to maximise its benefit, placing a third company based in Singapore between NSL Consolidated and it's Indian subsidiary to ensure that the company only pays tax once, which is around 30% in India.
If you are interested in further information or research, I am more than happy to oblige.
