Ann: MoU executed directly with Andhra Pradesh Govt, page-38

Iron ore price analysis



The above prices are based on information provided by NMDC. The state owned company operates out of Chhattisgarh and primary deals out of the port of Visakhapatnam (Vizag). The companies mines are are reasonable close to the port, influencing price of ore sales in the region.
As you will see, Kurnool is quite far away from this port and the local steel companies do not experience the benefits of global iron ore prices to such a degree.



As you can see below, spot prices for Fe 63.5% iron ore in China (origin anywhere) have fallen significantly over the past year.



It's important to note though that NSL was able to achieve a sale of 5000 tonnes Fe 55% at a price of Rs 2500 (A$55), which was announced on November 24. This price was described at the “current rate”.
The price of Fe 55% lumps in our area on November 24th was A$10 more than the price of Fe 65% lumps in Chhattisgarh.

That's A$10 more for a product, 10% lower in grade. This highlights either a significant gap in the two prices brought on by distance or a favorable price structure for our local domestic steel mills.

The cost of transporting iron ore by rail can add up to A$30 per tonne, making it uneconomical to transport ore from the port of Vizag to Kurnool. This generates a favorable position for NSL and highlights that prices of ore purchased in China sold in Chhattisgarh have a limited affect to the price of iron ore in our region.

The next five years for NSL.

NSL executed an MoU directly with the government of Andhra Pradesh this week, one year after identifying NSL's AP14 project as a significant project to national infrastructure. The MoU outlines a plan to support a five year growth strategy in Andhra Pradesh.
As part of this strategy, a 28,000 acre industrial park is to be developed only 30kms from NSL's operations.

Approximately one ton of steel is required for every 18.58 m2 of building area.
18.58m2 = 1 tonne of steel
28,000 acre = 113.311km2
To produce 1 tonne of crude steel, it requires around 1.4 tonnes of iron ore.
If it takes 1.4 tonnes of iron ore to build 18.5 m2 of industrial area, we can see that it would require approximately:
(113 square kilometers) / (18.5 square meters) = 6 124 9712 tonnes of steel
6,124,972 * 1.4 = 8,574,960 tonnes of iron ore

This indicates that a rough estimate of steel requirements would require over 8 million tonnes of iron ore to allow construction of the entire industrial area.

Even with the current price of 65% Lump ore from NMDC being A$37. Our previous cost per tonne was advised to be around $28. However, it was later quoted as being 75%. We can work with either of these numbers but they are both essentially $28 at this point in time.

Cost: A$28
A$37 – A$28 = A$9
A$9 x 8,000,000 = A$72,000,000 profit
Let's say for example that we were to get our A$10 extra for being local and not using the prices of far away NMDC.

Cost: A$28
A$47 – A$28 = A$19
A$19 x 8,000,000 = A$152,000,000 profit

OR

Cost: 75% (A$35.25)
A$47 - A$35.25 = A$11.75
A$11.75 x 8,000,000 = A$94,000,000

Keeping in mind that this price was based off of a Fe 55% product, a further premium could be possible for selling ore that is suitable for steel manufacturing. So one could argue that if these kind of production levels were achieved, a profit of $72,000,000 per annum would be a very low ball figure.

If the price of iron ore was to fall any further for the rest of the world, perhaps even to US$28, with the cost per tonne being A$28, the company would still be in a favorable position to turn a profit of A$12 per tonne, totaling A$96,000.000 per annum.

Getting to a production capacity of 8,000,000 tonnes per annum won't happen over night, but it is very possible with enough funding and support for the government of AP.

It would have wide ranging implication for NSL as a company and would once again put it back up there with it's original hematite project 6 years ago.

This potentially is within the next 5 years.

How many stocks have a deal with a government to ensure that they go from 400,000 tonnes per annum of iron ore production to over 8,400,000 tonnes, 30km from a brand new 28,000 acre industrial area.
A market capital about 18 times lower than one years profits if this project gets off the ground. Making it nearly 100 times undervalued when reaching a PE ration of 11.

Now I am in no way saying that it will achieve any of this, and that the company are suddenly anymore likely to succeed but those are some pretty awesome odds. Within 5 years, a company could justify a share price 100 times higher than it currently is.

If there is more news of this project actually happening and progressing, it will be a good sign that this is not simply a piece of paper. An actual deal with the government that is going to happen with their full support and potentially allow a small Aussie miner to become a major player in India.