Lloyds Metals & Energy: 3.3X mining capacity expansion & transformation into an integrated steel manufacturer
Solid growth in FY23 and Q1-24. Integration into steelmaking is the future. Value added steel to give better returns than iron ore mining
1. Metals & mining company
Mining iron ore, manufacturing sponge iron and generating power
lloyds.in | BOM:512455
Lloyds Metals and Energy Limited (LMEL) has
Iron ore mining lease in Gadchiroli, Maharashtra
Sponge iron (DRI) plant at Chandrapur, Maharashtra, capacity of 270K MTPA
Along with a captive 30MW power
Transforming to a fully integrated steel manufacturer
LMEL is setting up a fully integrated Steel Manufacturing facility expected to commence in FY26. On completion, LMEL will have
10 mt of Iron ore mining capacity
672k MTPA direct reduced iron (DRI) or sponge iron capacity
100MW of CPP (captive power plant)
4MPTA of Pellet capacity
0.5MTPA of Steel capacity
0.5 MTPA of wire rods capacity
Direct reduced iron (DRI), also called sponge iron, is produced from the direct reduction of iron ore into iron.
Steel Melting Shop (SMS) receives Hot Metal (HM) from Iron-making units and converts it into various grades of Steel and casts them into Slabs, Blooms, Billets, Beam blanks, Rounds and thin slab- HR coils.
Wire rod mill (WRM) is to reheat and roll steel billets into wire rods
2. 100% capacity utilization drove growth in FY23
FY23 growth: First full year of iron ore mining operations
The company extracted 3 mn tonnes in FY23, which was the rated capacity for FY23.
3. Q1-24: Growth driven by capacity expansion
100%+ YoY and QoQ revenue, EBITDA growth
Revenue up 131% YoY and 121% QoQ.
EBITDA up 100% YoY and 198% QoQ
Q1-24 growth: 3.3X mining capacity in Q1-24 over FY23 capacity
Company received EC for 10mn tonnes on March-23, and with infrastructure in place, the company began mining for expanded capacities.
Mining: Volumes for iron ore in Q1-FY24 stood at 3.4 Mn Tonnes, higher by 187% YoY and 205% QoQ.
DRI/ sponge iron: Capacity utilisation for DRI was reported at 91% in Q1-FY24 as against 63% in Q1-FY23 & 70% in Q4-FY23.
4. FY23 return ratios improving with capacity expansion
CAPEX to be funded predominantly via Internal accruals
Under the state government's policy of ‘IPS refund, LMEL is entitled to receive 110% of the Chandrapur project cost and 150% of the Gadhchiroli project cost as a subsidy from the state government (in the form of SGST refunds)
5. Outlook: Capacity expansion & transformation a miner into an integrated steel manufacturer by FY26
Potential for revenue to grow 3.3X as mining increases from 3 to 10MTPA
Company received EC for 10mn tonnes on March-23, and with infrastructure in place, the company began mining for expanded capacities.
Possibility of increasing mining capacity from 10 to 12 MTPA
We also seek to apply for EC to enhance the Mining Capacity of the Surjagarh Iron Ore Mines of the Company from 10MTPA to 12 MTPA. This increase of 20% is within EC norms, whereby no public hearing is required.
DRI capacity 1.3x in H1-24, increasing to 350K MTPA
Construction work is in full swing, with Civil work being done. Expected commissioning – H1FY24
Moving up the value chain will improve margins
Captive iron ore reserves to give consistency in profits
Value added Steel to give better Returns
Complete funding through Internal Accruals
7. Potential to 3X revenue by FY26 at a PE (TTM) of 23
8. So Wait and Watch
If I hold the stock then one must wait and watch for quarterly results to see if the company is on track to deliver 3X revenues by FY26. One needs to keep a watch on the planned capacities coming online as per schedule given by management.
9. Join the ride
If I am looking to enter the stock then
Valuations are priced reasonably. PE of 23 for 3X revenue by FY26. Opportunities to make money in the stock exist in the mid to long term.
FY23 was the first full year of iron ore mining operations. The track record of LMEL to deliver growth is limited.
Additionally execution of the transformation from a miner to an integrated steel manufacturer is a first time challenge for LMEL.
Positions need to be built over time over bad days when the stock is not doing well.
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Disclaimer
It is an analysis of the company data and not a stock recommendation
My analysis can be completely wrong and can change the next minute based on changes in my understanding of the company
I look to own good companies at prices where there is a path to market beating returns over decades