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India Globalization Capital, Inc. (NYSE Amex: IGC) - Will the Ban on Indian Iron Ore be Lifted?

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India Globalization Capital, Inc. (NYSE Amex: IGC) is based in Bethesda, MD, but it is a pure play on the strength of the Chinese economy and the development of the infrastructure in India. The Indian government has confirmed plans to modernize the Indian Infrastructure and expects spend around $22 billion in the next 12 months on roads, highways, materials, and construction. Even though IGC benefits from this expansion, the real hidden play here is in the exportation of iron ore to China. In our opinion, the recent decline in shares of IGC has created a tremendous buying opportunity with the potential for a near-term double. Longer term, we believe shares of IGC will continue to increase in price as they are tied to both the Indian and Chinese economies.

We alerted our subscribers to IGC in April, 2010 at $1.10 per share. Less than 60 days later, IGC announced a $35 million iron ore contract with a leading Chinese mining and smelting conglomerate. The stock moved sharply higher to trade at $2.50 on heavier than normal volume. Many of our subscribers profited from our pick, selling all, or part, of their shares for more than twice what they paid for them. We were right then, and we will be right again.

One of the main reasons for the decline in shares of IGC is that the Indian state of Karnataka banned exports of iron ore from 10 ports in July, and subsequently stopped issuing transport permits for iron ore meant for exports from other ports. Karnatakan officials cited a drive against illegal mining and the need to preserve the resource for local steel makers as the main reasons for their decision to stop iron ore exports. Since IGC ships from ports in Karnataka, this decision had a serious impact on shipping traffic. The serious backlog that was created limited the amount of iron ore IGC could ship out of the country. As a result, IGC shares traded to a new low of $0.58 on August 27, 2010. When it looked like Karnatakan officials were going to open the ports again, shares of IGC rallied to trade as high as $1.28 on September 29, 2010. The ban on ore in Karnataka is expected to be lifted on January 28, 2011 according to the court order. Between the ban being lifted, which will result in IGC shipping ore again, and the end of the year tax selling drying up in the U.S. stock market, in our opinion, shares of IGC could move back above $1.00 fairly soon. As far as the longer term outlook, IGC has numerous other business interests, which give them some diversification away from the iron ore business.

More Business Than Iron Ore

In addition to the export of iron ore to China, IGC also engages in the operations and supply of rock aggregate, and the civil construction of roads and highways, Present and past clients of IGC include various Indian government organizations and steel mills in China. Including its subsidiaries, IGC has approximately 150 employees and contractors. Currently, IGC is focused on building out rock aggregate quarries, setting up relations and export hubs for the export of iron ore to China, and winning construction contracts.

On January 26, 2010 Minister Kamal Nath, India’s Minister for Road Transport and Highways, told the Wall Street Journal that he plans to build 20 kilometers (12.5 miles) of road every day and raise $41 billion in private sector investment in the next three to four years. This build out of infrastructure in India, in our opinion, will create a substantial demand for rock aggregate. In addition, according to Standard and Poor’s, China’s steel production in 2009 increased 13.4% from 2008 and is expected to increase by 21% in 2010. We believe that these trends will continue to be favorable to IGC's three-fold business model.

Mining and Quarrying

As Indian infrastructure modernizes, the demand for raw materials, like stone aggregate, coal, ore and similar resources is projected to greatly increase. In 2009, according to the Freedonia Group, India was the third largest stone aggregate market in the world. The report projected that Indian demand for crushed stone would increase to 770 million metric tons in 2013 and 1.08 billion metric tons in 2018. IGC is currently in the process of teaming with landowners to build out rock quarries. In addition, the Company has licenses for the development of rock aggregate quarries.

However, IGC's mining and trading activity centers on the export of iron ore to China. According to International Business Times, August 6, 2010, India is the third largest producer of iron ore producing around 277 million metric tons of ore behind Brazil and Australia. The Freedonia Group projected in May 2010 that China’s $1.15 trillion construction industry will grow 9.1% every year until 2014. This growth will increase China’s already large demand for steel. China is expected to produce 600 million metric tons of steel in 2010, which, as the Wall Street Journal reported, is expected to be almost half of total global output. We believe that IGC is well positioned to provide Chinese steel mills with the iron ore needed to meet demand.

Iron Ore

In recent months, IGC has announced contracts with Chinese steel mills to provide more than $200 million dollars worth of iron ore over the next five years. This is a major piece of business for IGC and, in our opinion, once it starts to be delivered, investors could see the stock moving much higher. To sweeten the pot, in recent months, iron ore prices have risen to their highest level in six months. Persistent rains in India disrupted mine output, which is not that out of the ordinary for India, however Chinese steelmakers have began restocking ahead of winter. This is extremely bullish for IGC. As reported by American Metal Market, in November 2010, spot prices exceeded $167 a metric ton, the highest since prices briefly reached a two year high of $190–$192 a metric ton in late April 2010.

Over the past year, IGC has strategically positioned its business model to focus on its iron ore and rock aggregate materials business. Between rising prices and strong demand for iron ore, we believe IGC could make new highs on fundamental results.

Keep in mind, much of the rise in prices has been driven by China’s economic development. It seems everyone has an opinion on the Chinese economy these days, but the fact remains that construction, and manufacturers of steel, continues to forge ahead. China’s domestic production of steel reached 426.6 million tons as of August 2010, and is expected to reach 640 million tons for the full year, according to Emerging Markets Direct. The World Steel Association estimates China’s apparent steel consumption accounts for 48% of world demand.

Indian iron ore is a necessity to China’s booming steel production. What a lot of people do not know is that India is the world’s third largest iron ore exporter. In fact, India produces 11.3% of the world’s supply in 2009, according to the U.S. Geological Survey. As a consequence of the temporary ban on exports by the Karnataka government, which coincided with the extended monsoon season, exports from India have been reduced by 38% this year. As we previously stated, Karnataka is the second-biggest iron ore producing state in India. The temporary ban was instituted on July 26, 2010 and the Karnataka High Court recently directed the government to put in place, by January 28, 2011, measures to curb illegal mining activity.

The most important thing to remember is that IGC has seen a dramatic drop in our revenue due to the temporary ban and inclement weather. As a result, the stock price has moved into oversold territory, which, in our opinion, creates a tremendous buying opportunity for investors. Not only have these external factors made IGC a great buy at these levels, but the Company has used the brief lull in its business to improve its processes and develop a three-pronged strategy. First, IGC plans to widen its customer base by establishing relationships with mine owners and establishing the processes to ship ore. This is a potentially explosive situation for IGC’s business, since the demand for iron ore has been increased by the shipping ban. Second, IGC plans to establish a site for crushing raw ore into ore fine, which will increase its net margins to between 10% and 15% thus controlling costs and establishing IGC as a value added supplier. The final prong to IGC’s strategy is to establish a partnership (joint venture) with an iron ore mine owner. IGC will provide the funding, customer base, mining expertise, supply chain processes, management and storage at the sea port for shipping. In our opinion, this overall strategy will create considerable share holder value, as it positions IGC as a supplier with assets and vertical integration over its costs and processes. IGC is continuing to execute on this strategy while waiting for the ports to reopen. In our opinion, you want to own IGC before the ports reopen in January.

India’s Growing Economy

The CIA 2010 World Fact Book estimated the Indian GDP to be approximately $1.1 trillion in 2009. According to the World Bank, only fourteen economies including India, Mexico and Australia generated more than $1 Trillion in GDP in 2008. According to the CIA 2010 World Fact Book, India’s growth rates ranged from 6.2% to 9.6% for the past few years. The current global financial crisis created a liquidity crunch starting in October 2008, which has partially abated. The Financial Times noted that a recent Economic Survey of India projected growth at 8.5% in 2010 and 9% in 2011, second only to that of China.

India’s GDP growth for the fiscal year ending March 31, 2010 was estimated to be about the same as 2009’s growth rate. The stagnant GDP growth rate was caused by the global financial crisis. However, it does indicate that India has withstood the global downturn better than many nations. The factors contributing to maintaining the relatively high growth included growth in the agriculture and service industries, favorable demographic dynamics (India has a large youth population that exceeds 550 million), the savings rate, and the spending habits of the Indian middle class. Other factors that led to growth include: changing investment patterns, increasing consumerism, healthy business confidence, inflows of foreign investment (India ranks #3 in the A.T. Kearney “FDI Confidence Index” for 2010), and improvements in the Indian banking system.

To sustain India’s fast growing economy, infrastructure investment in India is expected to increase to 9 percent of GDP by 2014, up from 5 percent in 2006-07. This forecast is based on The Indian Planning Commission’s statement in its annual publication that for the Eleventh Plan period (2007-12), a large investment of approximately $494 billion is required for Infrastructure build-out and modernization. This industry is one of the largest employers in the country. The construction industry alone employs more than 30 million people.

According to the Business Monitor International (NYSE:BMI), by 2012, the construction industry’s contribution to India’s GDP is forecasted to be 16.98%.

This ambitious infrastructure development mandate by the Indian Government will require funding. The Government of India has already raised funds from multi-lateral agencies such as the World Bank and the Asian Development Bank. The India Infrastructure Company was set up to support projects by guaranteeing up to $2.0 billion annually. In addition, the Indian government has identified public-private partnerships (NYSE:PPP) as the cornerstone of its infrastructure development policy. The Indian government is also proactively seeking additional FDI and approval is not required for up to 100% of FDI in most infrastructure areas. According to Indian Prime Minister, Dr. Manmohan Singh, India needs $1 trillion in Infrastructure spending between fiscal years 2011/2012 and 2016/2017.

The Indian government is also permitting External Commercial Borrowings (ECB’s) as a source of financing Indian companies looking to expand existing capacity and incubation for new startups. ECB’s include commercial bank loans, buyers' credit, suppliers' credit, securitized instruments such as floating rate notes and fixed rate bonds, credit from official export credit agencies, and commercial borrowings from private sector multilateral financial institutions such as the International Finance Corporation (Washington, DC), ADB, AFIC, CDC, etc. National credit policies seek to keep an annual cap or ceiling on access to ECB, consistent with prudent debt management. These policies encourage a greater emphasis on infrastructure projects in core sectors such as power, oil exploration, telecom, railways, roads and bridges, ports, industrial parks, urban infrastructure, and exporting.

Some of the areas where ECBs are utilized are the National Highway Development Project and the National Maritime Development Program. Some of the major infrastructure projects planned are constructing dedicated freight corridors between Mumbai-Delhi and Ludhiana-Kolkata; capacity addition of 485 million metric tons in major ports and 345 million metric tons in minor ports; modernization and redevelopment of 21 railway stations; developing 16 million hectares through small, medium and large irrigation works; modernization and redevelopment of 4 metro and 35 non-metro airports; iPden Quadrilateral and other selected national highways; and constructing 228,000 miles of new rural roads, while upgrading the existing 230,000 miles covering 78,304 rural towns.

Present and past clients include various Indian government organizations and steel mills in China. In our opinion, since IGC participates in the growth of both India and China’s infrastructure, this offers some economic diversification, while offering investors an opportunity to benefit from the rapid growth of both economies.


Dr. Ranga Krishna – Chairman and Audit Committee Chairman: Dr. Krishna, has served as IGC’s Chairman of the Board since December 15, 2005. Dr. Krishna previously served as a Director from May 25, 2005 to December 15, 2005 and as our Special Advisor from April 29, 2005 through June 29, 2005. In 1998, he founded Rising Sun Holding, LLC, a $120 million construction and land banking company. In September 1999, he co-founded Fastscribe, Inc., an Internet-based medical and legal transcription company with its operations in India with over 200 employees. He has served as a director of Fastscribe since September 1999. He is currently the Managing Partner. In February 2003, Dr. Krishna founded International Pharma Trials, Inc., a company with operations in India and over 150 employees, which assists U.S. pharmaceutical companies performing Phase II clinical trials in India. He is currently the Chairman and CEO of that company. In April 2004, Dr. Krishna founded Global Medical Staffing Solutions, Inc., a company that recruits nurses and other medical professionals from India and places them in U.S. hospitals. Dr. Krishna is currently serving as the Chairman and CEO of that company. On November 7, 2008 he joined the board of TransTech Service Partners, a SPAC which initiated liquidation on May 23rd, 2009. Dr. Krishna is a member of several organizations, including the American Academy of Neurology and the Medical Society of the State of New York. He is also a member of the Medical Arbitration panel for the New York State Worker's Compensation Board. Dr. Krishna was trained at New York's Mount Sinai Medical Center (1991-1994) and New York University (1994-1996).

Mr. Ram Mukunda – Executive Chairman, President and CEO: Mr. Mukunda has served as Chief Executive Officer, President and a Director since IGC’s inception on April 29, 2005 and was Chairman of the Board from April 29, 2005 through December 15, 2005. Since September 2004 Mr. Mukunda has served as Chief Executive Officer of Integrated Global Networks, LLC, a communications contractor in the U.S. Government. From January 1990 to May 2004, Mr. Mukunda served as Founder, Chairman and Chief Executive Officer of Startec Global Communications, an international telecommunications carrier focused on providing voice over Internet protocol (OTCPK:VOIP) services to the emerging economies. Startec was among the first carriers to have a direct operating agreement with India for the provision of telecom services. Mr. Mukunda was responsible for the organizing, structuring, and integrating a number of companies owned by Startec. Many of these companies provided strategic investments in India-based operations or provided services to India-based companies. Under Mr. Mukunda's tenure at Startec, the company made an initial public offering of its equity securities in 1997 and conducted a public high-yield debt offering in 1998.

From June 1987 to January 1990, Mr. Mukunda served as Strategic Planning Advisor at INTELSAT, a provider of satellite capacity. Mr. Mukunda serves on the Board of Visitors at the University of Maryland School of Engineering. From 2001-2003, he was a Council Member at Harvard's Kennedy School of Government, Belfer Center of Science and International Affairs. Mr. Mukunda is the recipient of several awards, including the University of Maryland's 2001 Distinguished Engineering Alumnus Award and the 1998 Ernst & Young, LLP's Entrepreneur of the Year Award. He holds B.S. degrees in electrical engineering and mathematics and a MS in Engineering from the University of Maryland.

John B. Selvaraj - Treasurer and Principal Accounting Officer John B. Selvaraj has served as IGC's Treasurer and Principal Accounting Officer since November 27, 2006. From November 15, 1997 to August 10, 2007, Mr. Selvaraj served in various capacities with Startec, Inc., including from January 2001 to April 2006 as Vice President of Finance and Accounting where he was responsible for SEC reporting and international subsidiary consolidation. Prior to joining Startec, from July 1984 to December 1994, Mr. Selvaraj served as the Chief Financial and Administration Officer for the US office of the European Union. In 1969, Mr. Selvaraj received a BBA in Accounting from Spicer Memorial College India, and an Executive MBA, in 1993, from Averette University, Virginia. Mr. Selvaraj is a Charted Accountant (CA, 1971).

Mr. K. Parthasarathy - Head of Indian Operations: Mr. Parthasarathy has a long and distinguished career in leadership positions both in the private and public sectors in India and has been a chartered accountant for more than 20 years. Most recently, Mr. Parthasarathy has been the Chairman and Managing Director of Hindustan Steelworks Construction Limited, (HSCL), an infrastructure company owned by the Government of India. His appointment was made under the Indian Ministry of Steel; prior to this appointment, he was also the Director of Finance for the company. Mr. Parthasarathy grew HSCL to over $140 million of revenue with a construction backlog of orders of over $300 million and a work force of more than 1,200 employees.

Sudhakar Shenoy – Director: Since January 1981, Mr. Shenoy has been the Founder, Chairman and CEO of Information Management Consulting, Inc., a business solutions and technology provider to the government, business, health and life science sectors. Mr. Shenoy is a member of the Non Resident Indian Advisory Group that advises the Prime Minister of India on strategies for attracting foreign direct investment. Mr. Shenoy was selected for the United States Presidential Trade and Development Mission to India in 1995. From 2002 to June 2005 he served as the chairman of the Northern Virginia Technology Council. In 1970, Mr. Shenoy received a B. Tech (Hons.) in electrical engineering from the Indian Institute of Technology. In 1971 and 1973, he received an M.S. in electrical engineering and an M.B.A. from the University of Connecticut Schools of Engineering and Business Administration, respectively.

Richard Prins – Director: Since March 1996, he has been the Director of Investment Banking at Ferris, Baker Watts, Incorporated, which was the lead underwriter for IGC's IPO. Prior to Ferris, Baker Watts, from July 1988 to March 1996, Mr. Prins was Senior Vice President and Managing Director for the Investment Banking Division of Crestar Financial Corporation (SunTrust Banks). From 1993 to 1998, he was with the leveraged buy out firm of Tuscarora Corporation. Since February 2003, he has been on the board of Amphastar Pharma and since April 2006 he has been on the board of Advancing Native Missions, a non-profit. Mr. Prins holds a B.A. degree from Colgate University (1980), and an M.B.A. from Oral Roberts University (1983).

Suhail Nathani – Director: Since September 2001, he has served as a partner at the Economics Laws Practice in India, which he co-founded. The 25-person firm focuses on consulting, general corporate law, tax regulations, foreign investments and issues relating to the World Trade Organization (WTO). From December 1998 to September 2001, Mr. Nathani was the Proprietor of the Strategic Law Group, also in India, where he practiced telecommunications law, general litigation and licensing. Mr. Nathani earned a LLM in 1991 from Duke University School of Law. In 1990 Mr. Nathani graduated from Cambridge University with a MA (Hons) in Law. In 1987, he graduated from Sydenham College of Commerce and Economics in Bombay, India.

IGC Potential

In our opinion, investors who purchase shares of IGC have an opportunity to participate in India's growing economy. Over the next five years India has plans to construct dedicated freight corridors between Mumbai-Delhi and Ludhiana-Kolkata. Also planned is a capacity addition of 485 million MT in Major Ports, 345 million MT in Minor Ports and the modernization and redevelopment of 21 railway stations. India also plans to develop 16 million hectares through major, medium and minor irrigation works, modernize and redevelop 4 metro and 35 non-metro airports, expand 6,500 km (4,038 Miles) of Golden Quadrilateral and selected National Highways to six lanes, and construct 228,000 miles of new rural roads, while renewing and upgrading the existing 230,000 miles covering 78,304 rural habitations.

In other words, there is a tremendous opportunity for a well managed company like IGC to reward its shareholders with fat profits. As India builds out its infrastructure, IGC is sure to profit. However, the real play on IGC shares centers around its iron ore business.

 Let's take a minute and review the facts surrounding IGC's iron ore business. IGC is a U.S. based company, with an aggressive management team, doing business in one of the world's fasts growing economies. As they say on TV, but wait, there's more. IGC is shipping the most highly utilized commodity, iron ore, to China, which holds the distinction of being the fastest growing economy in the world.

Here is where the story goes from good to great for investors. The big play in the stock market is that the government mandated ban on shipping iron ore has created a huge buying opportunity on shares of IGC. Just a few short months after investors bid IGC shares up to $2.50 from $1.00 on a $200 million iron ore contract, the government halted shipping in order to bust those shipping ore illegally.

In our opinion, this is a temporary setback, but a long-term positive for IGC. As illegal shippers are eliminated from the mix, legitimate enterprises, like IGC, will be in a tremendous position to pick up the shortfall in demand.

We have said it before, and we will say it again. Opportunities in the stock market are not always so clear as IGC. In our opinion, investors who purchase shares of this pure play on the fast-growing economies of both China and India should profit in both the long and short-term.

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