Morning Mumble: Inventory, How much Copper do the majors hold? VEDanta's I've tried to be positive & ANTO'fghastly buys 50% Barrick's Zaldivar

Good Morning,

What is often not considered in commodity cycles is the level of inventories. Admittedly this can act as a float and reserve. How much do the majors hold in inventories, at what price and how is hedged. We know Glencore (GLEN) had 331Kt in the year accounts for copper inventory. 

KAZ Minerals do not separate their inventory but estimates suggest a modest 27,957/t's of finished product, excluding goods in transit. KAZ, are likely to be better managed with their need for cashflow but also they have issues at the current copper price levels, paying the market near 60 cents a lb if one considers their all in costs. 

KAZ had a Q2 & H1 Update yesterday, if you're so inclined or are perhaps are one of the workers FQM are paying to twiddle their thumbs at Sentinel? 

Vedanta want you to believe they're a Nickel producer (at the moment) seeing as all other operating subsidiaries have taken a spanking on price. Over to Tom Albanese, CEO of a bunch of companies held within a complicated structure, with a hope they can get their hands on some Cairn India cash by year end:

"In Q1 we saw continued volatility in commodity prices, but Zinc has held up quite well in view of its strong fundamentals and is now the largest contributor to our EBITDA. We continue to focus on improving efficiency, costs, and enhancing production across our well-invested asset base. We have broken ground at the Gamsberg Zinc project in South Africa, improved production at Konkola mines in Zambia and remain on track to re-start iron ore production at Goa following the monsoons. Our diversified business model supported by strong operating strengths and structurally low cost assets will enable robust long term returns to stakeholders."

So, we'll focus on the good hand (Zinc) as Vedanta do not want us not look at the other hand, we'll keep it short. Vedanta have a very credible mined metal production increased of 42% to 232,162 tonnes, (Q1 2014, 163,131 tonnes), but strangely the bottom line is being punished. 

On the one hand, there's a positive production increase and costs being half decent, significant in numbers in fact, but yet at EBITDA level it’s a paltry 11%. In the absence of an accountancy qualification, is it not fair to suggest costs in the chain have risen somewhere? One has a suspicion the amendments to the Mines and Minerals Development Rights (MMDR) Act, means producers have to shovel more for the same money. 

So with taxation rates rising into 2016 as guided by the Indian Government, VED are going to have to focus further on the bottom line just to maintain existing profitability. Unless one has missed it, analysts are not factoring in the CSR Levy at 2.5%, previously 2% from memory plus the increases in corporation tax? With a campaign going on to lower the District Mineral Foundation (DMF) tax as miners in India are punished, there may be some hope. 

With a bunch of Aluminium producers campaigning for an increase in the import tax on ingots, it’s not surprising VED are are reviewing restructuring some of our high cost operations in the Aluminium segment. (Source: India worth a read with a mention of VED's subsidiary Balco). VED's aluminium contribution at EBITDA is negative. One just hopes for VED's sake there isn't a slump in Zinc prices, as it’s got a very large burden on the balance sheet currently. 

VED's net debt, only up a modest $300M. Over to VED to cover their own financial update, 

Financial Update

The Company had total cash and liquid investments of approximately US$8.2 billion and undrawn committed facilities of US$1.1 billion as at 30 June 2015. Gross debt and net debt was at US$17.0 billion and US$8.8 billion, respectively, at 30 June 2015, slightly higher than US$16.7 billion and US$8.5 billion at 31 March 2015, on account of funding for projects and higher working capital.

As at 30 June 2015, FY2016 debt maturities includes US$350 million of bank loans at Vedanta Plc for which refinancing is in place and US$ 2.1 billion of term debt at the subsidiaries, of which c.$400 mn has already been tied up and the balance is to be rolled over or refinanced through longer term debt. In FY2017, Vedanta Plc has debt maturities of US$2 billion, for which we are in an advanced stage of discussion with the banks and these are expected to be refinanced by the end of calendar year 2015, while subsidiaries have maturities of US$1.3 billion for which we are evaluating different structures and options.

Antofagasta will acquire a 50% interest in Compañia Minera Zaldívar Limitada (Zaldivar), and will become the operator of the Zaldivar copper mine. My question being, is it "expected to be immediately accretive to Antofagasta's earnings and cash flow per share."? Really? Saves Barrick (NYSE: ABX) from flogging some more of Acacia Mining! Or does it? 

The final thought goes to Syrah Resources, would you stump some cash up? 

Atb Fraser

Morning Mumble (Via Email): Vedanta Resources (VED) Wanna-B-LT & the need for circa $3.5B+ more in cash & as a side thought OXUS (OXS)

Good Morning,

The proposal, Vedanta Limited (VED Ltd) and Cairn India are to benefit by the merger. Vedanta Resources (VED) ownership in VED Ltd "may" be diluted to 50.1% from its current 62.9% holding.

Cairn India’s implied premium is 7.3%, not exactly enticing even allowing for the 7.5% Redeemable Preference Share. The alleged sweetener and merger is on the basis the deal is “allegedly” going to be tax neutral.

Its over to the minority holders of Cairn India to a) accept it b) hold up for an improved offer or b) worse the Indian government take a ‘different’ view on the valuation. If either happen, VED has serious issues with much needed cash, their financial covenants are in tatters.  

The biggest argument for the merger is allegedly to add “protection in diversity” in the business model. Quite why there’s a benefit to those “oil” investors that allegedly get exposure to “tier 1” assets is another story. The real benefit is the cash for VED (and associated entities) whom will also benefit from the re-rating.

Assuming all goes well, tax neutrality, and shareholder support, VED will be well placed. The question why Cairn India holders would want it, whether there’s a viewpoint of a bottom in commodity cycle taken or hope of recovery (overall).  After all, VED Ltd has had all its profit depleted by the commodity cycle. Aluminium en par with the collapse in oil, although oil has made some recovery.

VED’s entire structure is not out of the woods yet. VED Ltd need more cash than just “Cairn India’s” and the likely merger of Hindustan Zinc Ltd (HZL)(64.9%) that has near $1.5B in cash and Bharat Aluminium Company Ltd (BALCO) that has circa $1B in cash. The issue will be the Indian Government still has a near 29.5% holding in (HZL) and 49% in BALCO.

A recent enquiry  has just been dropped in respect of how “certain entities” including VED Ltd obtained their stake in HZL. This also included concerns over the price paid, which one might consider laughably cheap. Amazingly, Indian Government might not be so willing to let the remaining stake go as cheaply or without a special dividend.  

The sticking point is VED Ltd believe they have call options HZL and BALCO. Whereas the Indian Government don’t recognise nor consider these call options legal or valid. Whether the Indian Gov want to sell out their remaining 29.5% share in HZL and 49% in BALCO is another matter, or whether they want shares in VED Ltd. Admittedly the government have included the sale / proceeds of BALCO and HZL in their fiscal budget for next year (2016).

The Indian Government would be wise to convert the holding into VED Ltd, not only diluting VED’s UK holding/shareholders sub 50% perhaps more 35% (based on approximate valuations). The control benefits would be obvious…

A pure cash grab, whether BALCO and HZL are converted/merged remains a matter for the Indian Government demands/terms. Perhaps VED Ltd would be wise to maintain the current status quo, especially after the coal debacle in BALCO.

Over to those “minorities” to decide the outcome, perhaps determined over the weekend, VED will have to work hard to even justify anything near 600 pence. 

Its accepted that there's a confidentiality arrangement with regard to the international proceedings between the Republic of Uzbekistan and Oxus. Normal caveats to the risks associated with gossip, there appears to be some speculation in Uzbek, that negotiations are currently taking place between the two parties. Perhaps the company would like to clarify this. Whether these mutterings are speculators tired of the proceedings taking an inordinate length for award or not, one suspects they have a sniff of truth about them.  

Atb Fraser