Production Cut on Vedanta Aluminium's Radar

State-run Hindustan Copper's follow-on offer is unlikely to hit the market in the current fiscal year-ending March, its chairman and managing director Shakeel Ahmed said reporters recently. There is no clarity on the date. That is finanlised by the department of disinvestment but it will not come in the current fiscal year, he said. The long-delayed issue had been expected to hit the market in the March quarter. Hindustan Copper's follow-on public offer would consist of 10 percent fresh equity and 10 percent divested by the government. Ahmed, who had earlier told Reuters the share sale would raise up to $1 billion, declined to comment on the likely valuation. Recent media reports have said the offer may be priced at a steep discount to current market price. The stock has lost about a fifth of its value since the start of this year. The country's second largest aluminium producer NALCO may invest about Rs 700 crore for picking up stake in two mines of state-run Hindustan Copper and a detailed framework on strategic alliance is likely soon. The development comes ahead of the copper miner's share sale, which would see disinvestment of 10 per cent paid-up equity capital out of the government's shareholding in HCL along with issue of fresh equity of an equal size by the firm. Meanwhile, the state-run aluminium producer, Nalco plans to acquire significant stake in Hindustan Copper. Nalco's due diligence for buying stakes in Hindustan Copper's mines at Ghatshila in Jharkhand and Malanjkhand Copper Project in Madhya Pradesh is complete. Top officials of both the PSUs will be meeting soon over the issue. Both NALCO and HCL fall under the administrative control of Mines Ministry. A detailed framework is likely to determine the form of the strategic alliance as to whether it would be a joint venture agreement. A top Nalco official, who did not wish to be quoted, said NALCO's stake could be up to 50 per cent in both the mines as the lease ownership is with Hindustan Copper Ltd (HCL).

Bulgaria's largest zinc and lead smelter, KCM, will keep its metals output target unchanged in 2011 on hopes of stable conditions on the global markets. Nikola Dobrev, executive director of the holding company controlling the smelter, said this year KCM expects to produce 73,000 tonnes of zinc and up to 65,000 tonnes of lead. The plant, which exports almost all of its output to neighbouring Turkey, Greece and Romania, produced 73,000 tonnes of zinc and some 63,000 tonnes of lead last year, up 7.4 percent and 1.6 percent on an annual basis respectively. The economic crisis has delayed KCM's 150 million euro ($207.3 million) investment to upgrade lead production and boost zinc output. It is now expected to be fully completed by September 2013. Last year, KCM signed a loan deal with the Bulgarian arm of Italy's Unicredit and the European Bank for Reconstruction and Development which will provide 47.5 million euro each for the realisation of the project.

Poland's KGHM almost doubled its fourth-quarter net profit to 1.324 billion zlotys ($461 million), coming in above market expectations, as Europe's No. 2 copper producer benefitted from surging metal prices. Analysts saw the state-controlled miner earning 1.22 billion zlotys in the last three months of the year. The figure pegs KGHM's full-year bottom line at 4.57 billion, above the company's own forecasts of 4.46 billion. Copper prices, often viewed as a bellwether of global economic health due to its use in construction and other industrial applications, surged past the psychological $10,000 a tonne mark, mostly due to China buying. The metal's average price at the London Metal Exchange stood at $8,634 a tonne, the company said, boosting its sales 41 percent up to 4.7 billion, past the 4.4 billion seen by analysts. On the back of the strong metal, KGHM said earlier it saw its 2011 net profit jumping to a record 8.35 billion zlotys, helped also by the miner's plans to unload telecom assets. The company wants to pay a dividend of 30-50 percent of its 2010 earnings, as the cash-rich miner plans to spend 7.5 billion zlotys in 2011 on new deposits as part of a 30 billion-zloty capital expenditure scheme until 2019. Last year it agreed a joint venture with Abacus Mining to develop its Afton-Ajax copper-gold project in Kamloops, British Columbia earlier this year.

The demand for copper wires and cables has declined around 35 per cent in the last six months due to a dramatic spurt in copper prices. Consequently, cabling contractors in major infrastructure and housing projects are demanding revision in their contract valuation. Experts believe many infrastructure and constructions projects are delayed due to the ongoing negotiations between contractors and builders. The wire and cable industry accounts for over 30 per cent of the country's total consumption of 700,000 tonnes. Depending on the size of the project, copper wires and cables account for 7-10 per cent of the total cost. Sandeep Jain, managing director of Laurel Wires Ltd, a Mumbai-based cable manufacturer, said rising copper prices kept contractors away from the market in December and January, reducing the business nearly by half. Current prices were more than three times the cost of production, he added. Copper prices have quadrupled in the last two years from $2,800 a tonne in 2008 to over $10,000 tonnes at present. However, they have surged a phenomenal 39 per cent in the last six months from $7,195 on July 30, 2010. As a consequence, the Indian wire and cable industry is gradually shifting from copper to aluminium, especially in high-tensil wire applications. But, there are certain areas where copper wire can not be replaced with aluminium, like in household electrical equipment. The current price is purely speculative, based on low inventory and high demand from emerging economies like China, reckon analysts. India, being a copper-surplus country, realises better when global price rises, but the downstream industry takes a hit. Higher realisation might boost the top line of domestic companies, but would surely take a toll on the bottom line, said Jain. Surendra Mardia, ex-president of the trade body, Bombay Metal Exchange. But, impact would be severe when wire and cable companies would pass on the price rise to consumers within the next two months, Mardia added.

KGHM, Europe's second biggest copper producer, aims to become one of the world's top five producers by 2018 and is considering a dual share listing to help fund foreign expansion plans, its chief executive said. Hoping to continue to benefit from the surge in metal prices, the state-controlled Polish miner wants to raise its annual copper output by around a third to "well above" 700,000 tonnes in seven years via investments of around 30 billion zlotys ($10.5 billion), including 7.5 billion set aside for this year. Herbert Wirth said a listing on the Toronto stock exchange was most likely, which is already known for the large number of mining companies trading there. Most of KGHM's current output is produced from mines at home but last year it revived expansion plans to take advantage of rising metal prices that it expects to help make a net profit of around 8.4 billion zlotys ($2.9 billion) this year. That would be nearly double the 2010 net profit of 4.57 billion zlotys it reported, beating its own guidance, which was raised several times last year, as well as analyst expectations. KGHM is currently the ninth largest copper producer and second largest producer of silver. KGHM, which in the past has had mixed success in venturing outside its home base, last year set up a joint venture with Abacus Mining to develop its Afton-Ajax copper-gold project in Kamloops, British Columbia. The miner is now in talks with five parties about possible purchases, including three at an advanced stage, Wirth said, but did not elaborate.

The road shows to achieve the financial closure for Hindalco's Mahan Aluminium project have begun. The project, slated at Rs 9200 crore, will have a 359 kilo tonne per year (ktpy) aluminium smelting capacity and 900 MW of captive power. The debt to equity ration for the project will be 75:25. Hopefully, the company would be able to achieve the financial closure before the end of this financial year. The company is looking to raise the loan in rupee terms but there might be international banks who would be funding the debt. The company has mandated SBI Capital Markets, Citibank, Kotak Mahindra Bank and The Royal bank of Scotland for launching a rupee term loan. Hindalco is looking to commission the Mahan project by October 2011. The coal requirement for the captive 900 MW power plant at the site will be met from the Mahan Coal block allotted to Mahan Coal Ltd, a joint venture between Hindalco and Essar Power Ltd. The company, in a statement said, “As the Mahan coal block was included under the category of 'NO GO' area, the Forest Advisory Committee (FAC) has not given its decision on MCL's application for forest clearance. The Mahan coal block is awaiting forest clearance approval before further progress can be made.” It further said that a group of Ministers (GoM) has been set up by the Prime Minister to resolve all cases where there is significant progress on construction of the downstream projects and mining approvals is awaited from the Forest Department.

Other base metals' spiral in the past year, hedge funds are eyeing this white metal as the next growth avenue for high profitability. Until recently, aluminium was considered a subsidiary to copper for portfolio rebalancing in base metals. Global investment fund houses have gradually started booking it on the benchmark London Metal Exchange (LME). Generally, aluminium prices move in hand with copper, the LME market leader. The two metals compete in application industries, especially the electrical sector. But in the past year, a recovery in the US economy coupled with supply deficit forecast by the US-based International Copper Study Group (ICSG), raised supply concerns, thereby offering more potential of returns on investment for fund houses. Now, fund houses have realised that most base metals, barring aluminium, have already hit the high price forecast, with little upside bias left in those segments, said an analyst. Copper prices hit the roof about two weeks before, to surpass $10,000 a tonne on the LME. The red metal has recorded a gain of 36.7 per cent in the past year to February 21, to close at $9,829.5 a tonne. Tin gained the most, 91.7 per cent, in the past year, to close on February 21 at $32,400 a tonne, due to shortage of availability in global markets. Tin is a metal which requires no fundamentals for price movement. ICSG had earlier forecast copper prices to hit $11,000 a tonne by the end of the current calendar year. Rising demand from the stainless steel industry helped nickel prices rise 43.6 per cent in the past year. Since 67 per cent of global nickel output is used for stainless steel production, the future of nickel depends largely upon its user industry. Lead and zinc have surged 16.1 per cent and 12.6 per cent, respectively, to close at $2,545.5 a tonne and $2,658 a tonne, respectively, on the LME. Aluminium is the only metal left behind in the race for growth in base metals in the past year, which is why global hedge funds are seriously looking at it, said Jayanta Roy, an analyst with rating agency Icra. Before the global economic crisis erupted in September 2008, aluminium prices had risen to $3,200 a tonne, which sharply fell to below $1,300 a tonne in the first half of 2009. On LME-registered warehouses, total aluminium deposits are currently at 4.6 million tonnes. But the Chinese government's decision to close smelters with outdated technology, amid rising local demand in the country, is likely to replenish stocks in months to come. Therefore, aluminium holds immense potential for hedge fund investment. On an average about 15.7 Kwh of power is required to make a kg of aluminium from alumina. Electricity accounts for nearly 40 per cent of the cost of aluminium production.

Higher realisation in metals and increased contribution from the power business should help Sterlite Industries post strong growth in profits in 2011-12. Sterlite Industries, a leading and diversified base metal company, has seen its performance improve in the recent past. Although its December quarter numbers were somewhat subdued, they were in-line with Street expectations. However, recent news of the company's arbitration on Balco (over its call option to buy government's 49 per cent stake) not going in its favour saw Sterlite. The good part is that analysts still expect the company to report an improved performance over the next 12-15 months, led by a better outlook for base metals, benefits of an increase in volumes and a higher contribution from the energy business. At the current level of Rs 170, while the stock looks attractively priced (PE of less than nine times the estimated consolidated earnings for 2011-12), analysts value it at about Rs 200-240 a share based on sum-of-part valuations, which include Sterlite's stake in Hindustan Zinc and huge cash in the books worth Rs 20,820 crore (Rs 52 per share). While Sterlite's reported net profit was up 60 per cent year-on-year, adjusted profit (excluding expenses towards termination of the Asarco acquisition) was up nearly 22 per cent. The top line growth was backed by an increase in volumes, especially in the zinc business, and higher international metal prices.
On a year-on-year basis, average LME copper prices were up 28 per cent at $8,570 a tonne in the December 2010 quarter whereas aluminium gained 16 per cent ($2,361) and zinc 4 per cent ($2,329). However, Ebitda margins dropped to 23.7 per cent as against the 26.3 per cent last year due to higher input costs in the aluminium and zinc businesses. Additionally, a lower realisation in the power business at Rs 2.72 a unit (versus Rs 5.10) and higher input costs led to a 70 per cent decline in the power business Ebitda. On the whole, the pressure on operating profit margins was more than offset by lower interest costs and higher other income, helping the company report good growth in adjusted net profit.
Analysts expect Sterlite's profits to grow 24 per cent to Rs 4,646 crore in 2010-11, which looks achievable given that it has clocked profits of Rs 3,117 crore in the nine months to December 2010. More importantly, the outlook for industrial metals is improving as a result of higher domestic demand and a revival in the developed economies. The average LME base metal prices have been ruling firm and are seen inching higher. In the month of January itself, they are higher by about 2-10 per cent (except Zinc, which is down 3.4 per cent) compared to the average prices in the December quarter. Over the next one year , analysts expect a further 8-10 per cent gain in the LME base metal prices from the current levels.
In addition to the price rise, they expect volumes to rise to some extent on the back of higher capacity in the zinc, lead and silver production in 2011-12. Additionally, over the next 2-3 months, commercial production of Sterlite's 600 Mw (two units) power unit is expected to start, providing support to revenue growth and overall operating margins; the latter is expected to rise to over 31 per cent from an estimated 24 per cent in 2010-11. The high operating margins in the power business (around 50 per cent), supported by a low cost of production (Rs 1.76 a unit) are among factors that will help boost the company's profits in 2011-12.

South African miner Metorex reported a rise in July-December profit, boosted by higher copper prices and increased output, and said it expects production to rise this year. The company is further bullish on the price of copper and its growth projects ahead. Analysts are still very positive on the copper price, the fundamentals are good and supply is stressed with strong demand. With a busy project pipeline and potential for other brownfields expansion, the company seeks to more than double its current annual copper production of around 50,000 tonnes. The company's Kinsenda project in the Democratic Republic of the Congo (DRC) is one of the most advanced and Goodlace said it could increase Metorex's copper output by 40 per cent and would cost between $130-150 million to develop. The company had resolved technical problems at its Ruashi copper mine in the DRC and said it had two back-up transformers on site to avoid future disruptions. Metorex said adjusted headline earnings per share for the six months to end December rose to 32.2 cents compared with 12.8 cents in the first six months of last year. Headline EPS is the main profit gauge in South Africa and excludes certain one-time items. Copper production rose 5 percent to 26,358 tonnes during the six months while cobalt production increased by 26 percent to 2,021 tonnes. The company had resolved technical problems at its Ruashi copper mine in the DRC and said it had two back-up transformers on site to avoid future disruptions.

Xstrata beat expectations to more than quadruple its pre tax profit in 2010 on the back of a runaway rise in commodity prices. Xstrata's pre tax profit rose to $6.6 billion up from $1.53 billion a year ago on revenues that rose 34% to $30.5 billion. Copper prices which have jumped 30% in the last 12 months contributed $2.2 billion to Xstrata's $7.7 billion operating profit which was 75% up on last year. The firm unveiled a higher than expected dividend payment for the year to 25 cents compared to eight cents a year ago in a demonstration of the board's confidence in its plans for the year. Mr Paul Galloway analyst of Sanford Bernstein said that the dividend puts down a marker for cash return for other mining companies. Xstrata repeated its plans to increase overall production by 50% before the end of 2014 and said it was on track to continue 20 new or expanding projects in 2011.

In order to boost revenue from its mining sector, Indonesia has launched monthly benchmark prices for key base and precious metals to be in line with international markets. The energy ministry said under a new mining and coal law, miners must sell coal and minerals based on monthly government set price benchmarks. The government has applied coal price benchmark since early 2009. Mr Bambang Setiawan DG of coal and minerals at the Energy and Mineral Resources Ministry said that, "The benchmark prices will prevent miners from selling minerals cheaply." The government will set monthly benchmark prices for exports of copper, tin, nickel, aluminium, lead, zinc, gold, silver, platinum and palladium. Currently, companies set prices individually based on agreement with buyers.

The world's biggest copper miners increased output for a third consecutive quarter late last year, pushing operations hard to cash in on record-setting prices, as showed by Reuter's survey. Production restarts and expansion projects by 11 of the biggest publicly listed miners helped to boost output 2 percent in the fourth quarter, corporate reports showed last month. The figures exclude Chile's state-owned Codelco, which accounts for around 11 percent of the world's mined copper. While small, the production gain is significant as it suggests that miners are starting to have some success offsetting worsening ore.

Brazil's booming mining sector will more than triple output of iron ore, copper and gold by 2030, according to a government plan released. The plan also noted that the sector should boost local processing of minerals and be wary of excessive dependence on China. The broad 20 year plan which foresees investments of around USD 270 billion during the next 20 years highlights growing concern in Brazil that its commodities heavy economy is not creating enough jobs and is subject to the whims of the Asian giant. Mr Edison Lobao minister for mines and energy of Brazil said at the launch of the plan in Brasilia that it is clear there is a need for change in the management of our mineral resources. The document said that Brazil is entering a phase of reverse specialization or increased exports of raw, unprocessed minerals with an ever smaller proportion undergoing local processing before shipment.

Russian aluminium giant RUSAL is planning to refinance $5 billion of its debt this year, with $3 billion of the total coming via a syndicated loan, Oleg Mukhamedshin, deputy chief executive of capital markets said. The executive also said that the company would finance less than $1 billion with Eurobonds and about $1 billion with rouble bonds.

China, the world's top aluminium market, will continue to see a surplus in the next five years as output exceeds consumption, cutting profits for smelters. Production is likely to rise 24 percent from last year to 20 million tonnes this year, fuelled by new capacity and the restart of idle facilities. The capacity is expected to rise to 25 million tonnes this year, a rise of 14 percent from last year. In the 12th five-year plan period, the industry will still have a surplus. Demand will rise but it won't be able to catch up with the new capacity increase. Most smelters that had idled some capacity were restarting it. Electricity supplies fell between December last year and January, forcing smelters in the major producing provinces of Henan and Guizhou to close well over 1 million tonnes of capacity. Output should reach 20 million tonnes this year. The country's 2011 output estimate was higher than the 19 million tonnes expected by top aluminium producer Chalco and a forecast of 19.5 million tonnes by Antaike. The forum that China's aluminium industry was entering into a low-profit period and that supply would stay above demand in the domestic aluminium market in 2011-2015. Annual capacity of primary aluminium is likely to rise to 30 million tonnes in 2015. In order to limit the capacity rise, Beijing has stopped accepting applications for new aluminium smelting projects. the apparent consumption stood at 15.8 million tonnes last year. Consumption may rise 13.3 percent from a year earlier to 18 million tonnes in 2011. Antaike has predicted a surplus of 700,000 tonnes this year.

Productivity at aluminium producer Norsk Hydro's Qatar joint venture Qatalum's smelter plant exceeds previous estimates Qatalum is running very well and production is at least on the level it had communicated before. Brandtzaeg said the smelter cells were producing above expectations. The Norwegian firm's 50/50 venture with Qatar Petroleum, launched in 2009, has a design capacity of 585,000 tonnes of primary aluminium. However, Qatalum, one of the world's largest and potentially most efficient smelters, has suffered delays due to technical problems and is expected to be in full production by June. Brandtzaeg said the problem with faulty water pumps which caused the delayed ramp-up have now been solved.

Russia's Sual partners may sell their 15.8 percent stake in Rusal adds to pressure on the aluminium giant to divest its minority holding in Norilsk Nickel. Viktor Vekselberg, one of Sual's core shareholders, has said Rusal should accept a $12.8 billion offer to buy 20 percent of Norilsk Nickel, and sources told Moscow's Vedomosti daily that Sual now wants to sell its stake in Rusal. Deripaska holds 25 percent of Norilsk via aluminium giant UC Rusal and in December turned down an offer from Norilsk to buy out the entire stake. Minority Rusal shareholders, including Vekselberg and fellow tycoon Mikhail Prokhorov, have urged controlling shareholder Deripaska to accept the deal. Uralsib analysts said Deripaska's refusal may be the catalyst for Sual's exit from Rusal.

Aditya Birla Group firm, Hindalco Industries, declared a lock out at its Alupuram plant in Kerala in the wake of protest by workers. In a filing to the BSE, the company said that due to protracted acts of indiscipline by workmen at our Alupuram Plant, the company was forced to declare a lock out there.” Alupuram plant is situated in Ernakulam district and the country's first aluminium ingot was produced here in 1943, according to the company's website. Hindalco operates an extrusion unit, set up in 1955, in the plant with an annual capacity of 8,000 tonnes per annum. The unit is equipped with two extrusion presses, solutionising furnaces and heat treatment facility. It also has a packing facility. Alupuram has 300-odd strong multi skilled workforce. Hindalco, however, does not expect any adverse impact on the company's financials due to the lock out.

Western world unwrought aluminium stocks rose to 1.468 million tonnes at the end of January 2011, compared with a revised figure of 1.395 million tonnes in December 2010. Unwrought stocks stood at 1.266 million tonnes in January 2010, International Aluminium Institute (IAI) figures showed. Total aluminium smelter stocks excluding finished end-products rose to 2.595 million tonnes at the end of January 2011, versus a revised 2.515 million in December 2010 and 2.295 million tonnes in January 2010.