Copper prices have not been spared in the recent fall in values of the non-ferrous metal complex. But take a longer view and the picture is anything but alarming.
London Metal Exchange (LME) copper prices are still up by around 14% over a year ago. Recent data from China shows inflation coming under control, and that may ease the government’s efforts to calm growth. Even so, the country’s demand for copper for its construction activity remains healthy.
This should be food for thought for the government’s asset sale managers, who have Hindustan Copper Ltd as a candidate on the list. The cabinet had approved the copper firm’s disinvestment about a year-and-a-half ago. Falling stock indices and a crisis-struck government had sent the disinvestment plan into cold storage. But the disinvestment buzz is now back as the government seeks to repair the fiscal hole before the year ends.
In Hind Copper’s case, it may appear as if the government has missed the bus. At Rs228, its share is down by nearly 50% from a year ago, nearly twice the decline in the BSE Metal index. But the fall may have more to do with the prospect of better liquidity in the stock market since the public float is just 0.41%, with the rest being held by the government. Even after the sharp decline in value, the share trades at a price-to-earnings multiple of about 95 times its 2010-11 earnings per share. The initial plan was for a 20% stake sale, with the government selling 10%, and a 10% fresh equity issue by the firm. The revised plan will see only the government divesting, according to news reports. If that is correct, a smaller size will make it easier to market the issue to investors.
In the June quarter, Hind Copper’s sales rose by about 19% year-on-year, partly due to higher output and also higher copper prices. The company is planning to ramp up ore production in phases, from 3.6 million tonnes (mt) in 2010-11 to 12.4 mt in 2016-17. That should lead to higher revenue for the firm, as it can enhance metal production from mined ore.
Global economic worries have hit commodity prices, and LME copper is down 7.5% since 1 July. Codelco, a Chilean copper producer, believes that the deficit (production, less consumption) in 2010 will continue in 2011, but will change to a surplus in 2012. A surge in Chinese demand could upset these calculations. Codelco also cites analysts’ estimates that predict copper prices will moderate in 2012 and beyond, relative to their 2011 levels.
This suggests that now might be a good time for the government to go ahead with its stake sale plan. Better stock liquidity will also see greater investor interest, which should benefit the government if it decides to offload some more stock in the future.
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