Johannesburg - If successfully concluded, current negotiations between aluminium group Hulamin and BHP Billiton offer the tantalising prospect of comparatively stable earnings growth for Hulamin over the foreseeable future.
Such growth should see a reversal of fortunes for Hulamin shareholders who looked on as the share briefly traded at R40 when it was first listed in 2007, and subsequently drifted down to a low of R3 about one year ago. Yesterday the share closed unchanged at R6.30.
Discussions with BHP Billiton, which have been on the go for several months, relate to the future supply of aluminium slab from BHP Billiton’s casthouse at its Bayside facility in Richards Bay. The discussions appear to have become more urgent since BHP Billiton commenced an engagement process with its employees over the proposed restructuring of its Bayside operations.
In a cautionary statement released last week, Hulamin noted that it sourced approximately a third of its rolling slab requirements from the Bayside casthouse and produced the balance at its Camps Drift facility in Pietermaritzburg.
“As these negotiations may have a material effect on the price of the company’s securities, shareholders are advised to exercise caution when dealing in the company’s securities until further announcements are made,” Hulamin said.
Last year’s results for the six months to June, which were released at the end of July, referred to ongoing discussions with BHP Billiton with regard to the future of supplies from Bayside. At that stage Hulamin management stated: “Agreement has been reached to extend the supply of rolling slab to the end of March 2014.”
According to analysts, Hulamin has indicated that if it was not able to secure continued supply from Bayside it would be forced to downscale its business significantly as alternative supplies, which would have to be imported, would be too expensive.
Hulamin’s chief executive, Richard Jacob, told Business Report that if the negotiations were unsuccessful, the company would either expand its Pietermaritzburg facility or reduce output. An additional option involved the recycling of the existing product in the marketplace.
While the outlook for shareholders in the event of failed negotiations are uncertain to grim, things will look brighter in the event of success.
“If Hulamin is able to secure competitively priced aluminium feedstock it looks set for a brighter future on the back of a weaker rand and the recent introduction of aluminium can production in South Africa,” investment analyst Chris Logan said, referring to the coming on stream of Nampak’s first aluminium can line in September. Nampak has indicated it would be moving from steel cans to aluminium in the near future.
Nampak imports most of its requirements from Brazil-based Novelis. Jacob noted that the Nampak opportunity offered exciting potential, but that Hulamin must ensure the sustainable quality of the product being supplied to Nampak. The product involves the use of new technology at Hulamin.
The switch to aluminium cans, which is a worldwide phenomenon, has largely been driven by the increased ability to recycle aluminium cans. Jacob noted that in Brazil some 98 percent of aluminium cans were recycled last year. This not only increased their attractiveness among consumers, but reduced production costs.
Jacob said that over five years Hulamin could more than double the volume of rolled aluminium products sold in southern Africa to 100 000 tons from a current 50 000 tons.
At present Hulamin, which has the capacity to produce 200 000 tons of rolled aluminium, exports 75 percent of its output to North and South America, Europe, Asia and the Middle East. But as consumers in those markets pay the same price as South Africans and Hulamin has to pay hefty transport costs, the resulting margins on exports are lower.
Negotiations with BHP Billiton will determine the extent and speed with which Hulamin will be able to redirect production to the more attractive southern African market, which is why shareholders are likely to be tracking them closely. - Business Report