[miningmx.com] — ALTHOUGH a number of diversified listed mining companies have copper interests, the only pure South African copper play is Palabora Mining (Palamin). And with a relatively tightly held equity and the previous dividend dating as far back as mid-2001, and because funds have been conserved to meet the expensive switch from an open pit to underground mining, it doesn’t usually attract much investor attention.
But that could change, though preliminary figures for calendar and financial 2007 still contain a few nasties.
In particular, Palamin shows that it’s not only gold mines that enter into hedging contracts that may guarantee a certain revenue but can cost a fortune if product prices move the worng way – that is, upwards.
In the case of Palamin, the surging copper price has badly hit the hedge entered into to help finance the capital programme.
Realised hedge book losses rose from R1bn in 2006 to R1.3bn in 2007, trimming net sales to R4.9bn, against R4bn the year before. And in spite of this the unrealised loss on the hedge book more than doubled, from R1.5bn to R3.6bn.
Also impacting on the results is the R1.69bn full reversal of an earlier impairment provision. This flatters the unqualified net profit but damages HEPS (headline earnings per share), which are reported as 1,491c, a more modest gain on 2006’s 1,329c than might have been expected in the light of the copper price.
But while HEPS knock off the impairment charge reversal, they don’t appear to make any allowance for the tax charge on this, which Palabora puts at R551m. This should surely be added back to HEPS to arrive at a meaningful figure for normalised earnings, and at about 115c this would boost adjusted HEPS to 1,641c, almost a quarter up.
But whichever figure you prefer, there’s a healthy cover for the resumed dividend, of 310c a share.
In production terms, things are going well. Underground rock production of 32,450 tonnes/day is ahead of the rated design capacity of 30,000 tonnes. Refined copper output rose 13% and finished copper sales rose from 81,000 to 93,000 tonnes.
Higher prices for not just copper but also the manganese and vermiculite by-products and the weaker rand, contributed to the gains in revenue and profits. So did a R307m cut in the net interest rate charge, following loan repayments of an effective R1.4bn.
Palamin MD, Keith Marshall, calls it a “stellar” year, but offers no comment on the outlook for 2008, except that Palabora is confident of concluding a BEE deal.
Last year, first-half reported HEPS were 790c, suggesting that on a comparable basis the second half brought an improvement to 851c. The copper price is an imponderable but the progressive improvement in debt should bring a further gain in net finance income this year.
And in any event improved liquidity and declining capex commitments should allow a reduction – possibly substantial – in dividend cover.
The share price dipped well below 4,000c in early 2006 before starting a run that took it to 10,500c late last year. Subsequent market uncertainty took it down to just above 8,000c late last week, but the market liked these results, pushing the share back up to 9,500c.
In normal circumstances that would still look cheap, but investors will need no reminding that right now circumstances are anything but normal. Still, brokers on balance remain bullish of the stock.
