IGC: Zacks initiates coverage of India Globalization with an Outperform rating

Zacks Small Cap Research

Zacks has initiated coverage of India Globalization Capital, Inc. (NYSE MKT:IGC) with an Outperform rating and a target of $2.70. India Globalization is an infrastructure materials company, primarily through the beneficiation of iron ore in Inner Mongolia for delivery of high-grade iron ore to steel mills in China. Through an acquisition and operational growth strategy, the company is accumulating iron ore mining assets and complementary beneficiation plants in Inner Mongolia, a northern province of the People's Republic of China (PRC), to fulfill the growing infrastructure needs of the growing Chinese economy. India Globalization is also prepared to take advantage of infrastructure-related projects in the developing economy of India, especially opportunities in the iron ore, stone aggregate and transportation-related construction industries of southern and central India.

India Globalization is positioned to benefit from the high-grade iron ore demands of the steel industry in China. Currently, the company’s predominate operations are three iron ore beneficiation plants and four iron ore properties, all in Inner Mongolia, which were acquired through its H&F Ironman subsidiary in 2011. Management estimates Ironman’s iron ore reserves to be worth approximately $600 million, which is based on 4.8 million metric tons (MMT) of 66% grade iron ore at $127 per metric ton (Mt). IGC also has developed the physical facilities, along with the logistical and organizational structures, required to export iron ore from southern India to China.

For the current fiscal year ending March 2014, management’s strategy is to build a profitable revenue stream by utilizing Ironman's beneficiation plants with low-grade iron ore being sourced from Mongolia while simultaneously pursuing 1) mining licenses for the further development of Ironman’s mining properties and 2) the acquisition of additional iron ore mines in northern China. Management is targeting the procurement of three-to-six incremental mines near Ironman’s present facilities. Currently, the company is in the process of closing two other transactions: the acquisition of another adjacent property with 0.5 MMT of iron ore grading 66% Fe and purchase of a 25% interest in an iron ore mine and nearby beneficiation plant located in Aohan Banner, Inner Mongolia. In addition, management is pursuing the development of a business model that would allow Ironman’s beneficiation facilitates in China to process iron ore shipped from India once the mining production in India ramps up and the moratorium on exports is lifted. The driving factor of management’s operating strategy is that each beneficiation plant has the annual capacity to produce approximately 70,000 Mt of high-grade iron ore and to generate about $9.7 million in revenues at current iron prices of $138 per Mt. Management’s long-term goal is to operate 10 beneficiation plants in northern China.

India Globalization’s revenue profile is expected to experience growth through management’s execution of its iron ore beneficiation strategy in the PRC, which may be augmented by positive commodity pricing. Despite uncertainties concerning the timing of the beneficiation of the iron ore from Mongolia and the granting of mining permits for Ironman’s properties, the company's 12-month trailing revenues of $7.88 million project a target of $2.25 when valued at the mean industry P/S ratio of 2.0. However, this valuation is depressed, since the average iron ore mining stock is down 27.8% this year.

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