Ann: Phase 3 Expansion Update, page-32

Last week we noted that First Samuel clients invested in a capital raising by NSL ConsolidatedLtd (NSL) in order to support the business moving to a third phase of the expansion of its Kurnool, India benefaction plant (from 200,000 tonnes pa to 400,000 tonnes pa).

This week we wanted to elaborate a little on the investment.

Firstly, India is an excellent place to invest, based on growth. But also a tough place to invest, based on getting things done!

NSL is an iron ore producing company.  It takes low-grade local iron ore and converts it (through a process known as benefaction) into high-grade ore that can be used in Indian steel mills. After a near decade of development, and some significant struggles, NSL is now a producing business (the only Western-owned producer in India) and has earned its local operating credibility the hard way (time and sweat).

India is clearly a growing market for steel, given its large and economically developing population.  It is at a phase of development which based on other experiences (Korea, Japan and, the biggie, China) suggest that growth in demand should be substantial.



Critically, India is also short quality iron ore and has in the past two years moved to being a net importer.  This is a critical development for the iron ore industry globally.

India’s own iron ore production is centrally located (i.e. away from coastal cities) and this has historically led the steel mills to be located centrally as well.

As the quality and grade of the ore produced has continued to fall (broadly: ½ what it is in the Pilbara and required for quality steel production) the need to find other solutions has increased. Thus, putting NSL is an excellent strategic position.

It provides near Pilbara-quality iron ore, very close to the steel mills.

As a result, NSL has an unassailable cost advantage over imported ore (with much lower transport and logistics costs) and it is positioned to be a supplier of choice for local steel mills.



For this reason, the Andhra Pradesh government wish to see NSL expand rapidly to 8m tonnes pa of production (from 200,000 tonnes currently but expanding to 400,000 tonnes via this new expansion).

The downside of these types of investment are risks related to time slippage, project delivery and completion.

Clearly, it has taken NSL many years to get to this critical point (operating) and it has sunk around ~$52m to get here.  It has been a long hard slog for early shareholders, in fact, for all involved.

First Samuel clients' financial interest and participation has only developed now that the key risk (that of getting up and going) has, in our opinion, passed.  As a result we have been stepping up our ownership (from a very small weight initially for clients of ~1% of their equity portfolios to ~2% now) as our confidence grows and the business develops and becomes self-sufficient. Like we always do.

We estimate that the capital raising just undertaken has allowed us to invest this additional money at a price 20% below what will have been sunk into setting up the business (around $62m by FY-19) versus a market value (fully diluted) of $48m (at the current and raise price), and we are confident that the amount raised should be more than required for this expansion phase.

Notwithstanding likely delays (going on history, they will happen), we still expect an investment return that is more than sufficient to build clients' long-term wealth in the way we have done over the past 18 years.  NSL is a business that fundamentally has such strong incremental returns on investment that eventually the dilution and pain (of 9 long years) should be caught up.

In addition to the capital raising itself, we are pleased to see the company implicitly acknowledge itself as being at a new stage of life – announcing:

1. A pending name change to focus more on the business as an operating Indian business,
2. Boosting the hard experience on the board (a new Non-Executive Director - Raymond Betros was appointed in April),
3. A share consolidation (to get it away from being with all the $0.01c day trader stocks in the market) and
4. Putting in place an incentive scheme for the CEO heavily based on delivering success at the next stage (i.e. plant up and running).

NSL is now in the process of becoming an operating business.  In due course this will become apparent and will be appreciated by the market.

There won’t be many other places to get good long-term exposure to the growth of India