FPO | Metals
November 22, 2012
Bhavesh Chauhan
Hindustan Copper
Tel: 022- 39357800 Ext: 6821
Stretched Valuations
Vinay Rachh
Government of India is divesting 37,008,720 shares (4% stake) in Hindustan
Tel: 022- 39357600 Ext: 6841
Copper Ltd. (HCL) with an option to sell an additional 51,714,580 shares. It has
set a floor price of `155 for the issue. We recommend investors to AVOID
subscribing to shares due to expensive valuation.
Company overview
HCL was incorporated in 1967 to take over NMDC’s copper mines and plants.
The company’s core business includes exploration, mining beneficiation, smelting,
refining and casting of finished copper.The company has four operating units
namely Khetri Copper Complex in Rajasthan, Indian Copper Complex in Bihar
(both mining cum metallurgical complex), Malanjkhand Copper Complex in M.P.
(mining complex) & Taloja copper project in Maharastra (collaboration with
Southwire Company, US). The company's copper reserves and resources in
accordance with JORC standard are 411mn tonnes (average grade 1.05%) and
623mn tonnes (Average grade 1.04%) as on April 1, 2010, respectively, making
it the largest copper company in India.
Investment arguments
Expanding capacity to fully exploit India’s copper ore demand: India has a large
imbalance between its smelting/refining capacity as against its copper mining
capacity. Currently India’s smelting/refining capacity stands at 1MTPA for which
100MT of copper ore is required (assuming 1% cu). Currently India’s actual
copper ore production stands at 3.2MTPA which is entirely produced by HCL. So
in order to capitalize on this sustained demand, HCL plans to ramp up its
production capacity from the current 3.2MTPA to 12.4MTPA by FY2018 at a
capex of `2,500cr. The company aims to expand its Malanjkhand, Khetri, Kolihan
and Surda mines and Banwas Mine; further, it aims to re-open Rakha and
Kendadih mines and develop new mine Chapri-Sidheswar.
Single vertially integrated player in India: HCL is the only vertically integrated
player in India which has its operations span across the entire value chain. Their
core operations include mining of copper ore, concentration of copper ore into
copper concentrate through a beneficiation process and also smelting, refining
and extruding of the copper concentrate into refined copper in downstream
saleable products.
Possesses first mover advantage: Copper mining requires substantial investments
and time for greenfield projects to be set up. Also many clearances need to be
obtained from the Government for the same. This entails a lot of entry barriers in
this industry. HCL on the other hand has all its mining complexes near the major
copper ore deposits of the country. Thus any greenfield projects undertaken by
the company can rely on its existing infrastructure. Moreover, HCL has applied for
prospecting, mining and Reconnaissance Permit in the states of Rajasthan,
Jharkhand, Madhya Pradesh and Haryana.
Valuation: Although HCL is the only vertically integrated copper producer in India,
the stock is currently trading at an expensive valuation of
44.4x FY2012
EV/EBITDA due to low free float (0.41% of its market cap). Even at a floor price of
`155, it is trading at FY2012 EV/EBITDA of 24.5x, which is expensive compared
to its peers. Miners such as Coal India, MOIL and NMDC are trading in the range
of
5-10x FY2012 EV/EBITDA. Hence, we recommend investors to AVOID
subscribing to HCL issue.
Please refer to important disclosures at the end of this report
1
