Implications The outlook for the company is largely dependent upon the continuing recovery in the global economy and in particular the continuing positive outlook for China. In this regard, the China June PMI came in at 53.2, steady against the 53.1 in May, and continues the positive trend that has emerged in China growth over recent months. This also coincides with the stronger electrical production and continued agressive credit growth. Other anecdotal evidence that confidence in a gradual recovery in the global economy is seen in the Batic Freight Rate Index that has continued to increase from the March lows.
Copper represents the most levered base metal to increases in global growth expectations and represents investors best opportunity of participating in this recovery.
The company has a considerable amount of the production at the Nifty Oxide and Mt Gordon operations on care and maintenance, impacting production levels. The company has undertaken significant cost reduction over the past 12 months as copper prices fell dramtically in Q4CY2008. Copper production has also been impacted by lower grades and recoveries. This can be illustrated by the reduced production from 82Kt pa (FY2008), 70Ktpa (FY2009), and a forecast 57Ktpa (FY2010).
The cash operating costs are also coming down with the substantial improved efficiencies and focus on streamlining operations - from US$2.00 /lb in FY2009 to a forecast US$1.45 /lb in FY2010. We would expect that provided copper prices remain at around US$1.80 - US$2.00 / lb,, Aditya Birla's share price will remain relatively bouyant
The current copper spot prices (US$2.25/lb) are ahead of the current forecasts for FY2010 - US$1.80 (FY2010), US$2.35 (FY2011) and US$2.40 (FY2012). With further upside in the copper price, the company has strong earnings recovery potential. Although the company hedges a portion of its copper production, earnings are highly sensitive to copper price movements - net profit will change by approximately $7M ( 2 cps) for ewery Cu +/- 10c movement.assumming a 50% hedging policy. As regards currency movements a 5% movement in the USDAUD will result in a +/- $3M movement in earnings (1 cps). On current forecasts we would expect that FY2010 earnings will show a strong recovery, from the FY2009 losses, to be slightly positive, but with continued prices slightly above the current spot prices in FY2011 and FY2012 earnings would recover strongly. to approximately $30- 40M (10cps) in FY2011 and $60 - 70M (20 cps) in FY2012.
A major strength in the company structure is the 50.1% major shareholder, the Indian company Hidalco, that provides the company with the offtake copper production contract agreements. During the volatility over the past 12 months, this corporate structure has provided considerable stability during a difficult period for the mining industry. As the majoiry of the Group's sales are to its ultimate parent company, the credit worthiness of the company is negligible.The company has a liability to the Parent of $119M at 31 March balance date and total interest bearing debt at the balance date of $142M. Provided copper prices stabilise at or above the US $2.00/ lb this liability to the Parent company will be gradually repaid as free cash flow expand.
An investment in the company is purely a play on copper prices and an improving production profile in the medium term from the various mining operations - clearly, investment in this security carries inherent risk, a high earnings sensitivity to copper prices, exchange rates and operating costs.
Investment Opinion The copper price having fallen sharply in Q4CY2008, from near record levels. The sharp and sudden fall in the copper price has been quickly reflected in weaker share prices. We are expecting that copper prices will remain above US$2.00 / share through the forecast period. term. Operating costs are being reduced and with Hidalco conglomerate standing behind the company, near term outlook is improving
The company is the fourth largest copper producer in Australia. A strong balance sheet with an ungeared balance sheet. Other key fundamentals include a strong Board and management, minimal hedging in FY2010. The company has key long term copper concentrate offtake contracts with Hindalco for LOM. The company declared its initial dividend in FY08. Provided copper prices remain at or around current levels, the company is well positioned to grow strongly in coming years
ABY Price at posting:
60.0¢ Sentiment: Buy Disclosure: Held
(20min delay)