Hindustan Copper (HCL), the government-owned company with exclusive copper mining rights in India, is in a transformation mode even as it gets ready to hit the capital market.
First, it wants to focus on mining, rather than smelting, and plans to increase its mining activities three-fold. The company closed its smelting unit at Khetri in Rajasthan in December 2008 and this shuttered nearly two-thirds of its total smelting capacity of 50,000 tonne per annum.
In five to six years, HCL should increase its copper ore or copper concentrate production by at least 3.5 times, Shakeel Ahmed, HCL?s chairman & MD, said. ?Right now we mine 3.15 million tonne of copper ore per year. We want to go to 11.4 mt in the next six years. Although this plan is based on our existing mines, we are aggressively looking at getting new leases too,? Ahmed said.
According to Ahmed, an increased focus on mining will raise the company?s profitability since smelting has more risks than gains. HCL would prefer to project itself as a company with lower exposure to risks before it hits the capital market, which is likely post August this year.
HCL will offload 20% stake?currently, the government holds 99.59% in the company, banks and financial institutions 0.09%, private corporate bodies hold 0.05% and the general public 0.27%.
Ahmed said the mining ministry has already approved the disinvestment proposal. ?We hope to get the Cabinet clearance soon,? Ahmed added.
HCL plans to invest Rs 3,500 crore in the next five-six years to take up its mining capacity from 3.15 mt to 11.4mt. This investment, according to Ahmed, would not call for debt funding, as the company would raise money from the capital market.
In fact, HCL?s turnaround is being scripted around a renewed focus on its mining activity. Ahmed said smelting and refining are low margin, high-risk business. Globally as well as domestically there are excess refining capacities. Rather, there is a shortage of copper supply in the domestic market and HCL can take advantage of that.
According to Vineet Nigam, an analyst with ICRA, although HCL, as a pure or cathod copper producing company is small compared to Hindalco and Sterlite, which have capacities of 5 lakh tonnes and 4 lakh tonnes per annum, respectively, it is the only Indian company engaged in copper mining. ?So HCL can capture all the increase in copper prices, while the private sector copper smelters have to work out margins on the basis of their raw material cost,? Nigam said.
Ahmed said private sector copper smelters have to import copper concentrates for making pure copper and HCL, even after producing 11.4 mt of copper concentrate, would not be able to meet the demand of the smelters within the country. So, HCL?s business prospects lie more in mining than producing refined copper.
Pawan Burde, an analyst in PINC Research, feels that the strategy to focus only on mining looked good in the short term but as a long-term strategy, HCL should think of increasing smelting capacity as India?s copper demand is likely to grow in double-digits.
Ahmed is of the view that with a 7% growth, India?s demand for refined copper is likely to stand at around 5.9 lakh tonnes in 2010, much below the country?s present smelting capacity. ?If I plan smelting expansion now, it has to be based on imported concentrate, which really doesn?t make good business sense. In fact, closing down the Khetri unit was a conscious decision and before we plan to make another unit, we can resume operations of Khetri smelting unit,? he said. ?We have no immediate plan of restarting our Khetri smelter and we will only do so when the time demands,? Ahmed added.
Although India?s copper mining, exclusively done by HCL, is only 1.5% of the global mining, which is 19.5 mt per annum, its prices in India are governed by the London Metal Exchange (LME). Before the economic meltdown, LME prices of copper was $ 8,400 per tonne, which went right down to $3,000 per tonne during the meltdown. So, the meltdown put HCL on the mat with a loss of Rs 10.3 crore on sales of Rs 1,350 crore in 2008-09, but since prices have recovered and are now hovering around $7,500-7,900 per tonne, HCL expects to post a profit in 2009-2010 fiscal. ?Our net income will at least be Rs 100 crore this year,? Ahmed said.
The price rectification of copper will help HCL increase its profit and the fact that the company has put small customers in focus will help increase its customer network. ?HCL will now supply copper even to a customer who would require only 1 tonne?, Ahmed said. Earlier, HCL supplied copper to the bigger players and indirectly encouraged bigger HCL customers to supply to the smaller ones. The bigger customers used to get a rebate of as much as up to $120 per tonne on the premium, which HCL took over the LME price. Now HCL has brought down the rebate, even while extending it to smaller players. The maximum rebate offered at present is $80 per tonne and the minimum $30. ?Our initiative to supply small customers and alter the bandwidth of rebate from $ 0- 120 to $ 30- 80 has increased our per tonne realisation,? Ahmed said. ?We have shifted from a volumes game to a numbers game to bring about a change in the dynamics of our business because we have no control over prices except on the discount we give,? he added.
According to an MSTC official, India, unlike China, still doesn?t have any influence over LME prices. The US economy plays a big role on matters relating to copper demand and prices but right now the buoyancy is more on China?s account. ?MSTC is the sole government agency importing copper but in 2009-2010, the company hardly imported any copper?, the official said.