Mining glitches for Hindalco

Lack of clarity on coal blocks & bauxite mining bans add to uncertainties

The concerns on copper and aluminium major Hindalco’s domestic operations continue to increase. Even while analysts were contemplating the likely impact of the Supreme Court’s decision on coal mine allocations, the bauxite mining bans in Jharkhand has raised fresh concerns. Five of its bauxite mines in Jharkhand have been closed by the state government. Various analysts estimate about 35-45 per cent of Hindalco’s captive requirement being met by these impacted mines. Thus, any prolonged disruption (or closure) of mining activity will adversely affect Hindalco’s profitability. Factoring the cost differential between captive and imported bauxite, Espirito Santo’s analysts see an adverse impact of Rs 7.1 a share on their current fair value of Rs 155 for Hindalco.

The good part, say analysts, it that unlike the coal block issue which is to be decided by the court, the bauxite mining issue can be resolved faster by the company and the government. In this backdrop, the stock closed about two per cent lower on Tuesday, versus Sensex’s 1.2 per cent fall.

However, the market remains more concerned on the fate of coal blocks that are important to Hindalco’s profitability and earnings in the long run. While analyst have not factored its impact on Hindalco’s earnings till FY17, the market is a bit nervous which reflects in the 10 per cent decline in the stock from Rs 182 levels in August-end to Rs 160 now.

Among coal blocks under question, while Hindalco’s Talabira-I mine supplies 2.5 million tonnes per annum (mtpa) of coal to meet one-third of its requirement, Talibra-II and Mahan are essential for fuel security of its Aditya Aluminium project and 359,000 tpa greenfield smelter at Mahan, respectively, say analysts. The Mahan block’s inland location makes imported coal an unviable option due to inland freight costs, whereas the reducing e-auction coal volumes from Coal India on the back of fuel supply agreements would impact availability and costs of coal for the facility, estimates analysts.

This increased uncertainty on both coal and iron-ore mining seems to have taken a toll on the company’s plans for raising funds also. Hindalco, which had plans to raise Rs 5,000 crore through qualified institutional placement, has reportedly postponed it for now. The fund raising was being looked at in positive light as it would have helped reduce Hindalco’s debt which has increased from about Rs 24,000 crore in FY10 to Rs 64,000 crore in FY14 due to on-going expansions.

These mining issues are also casting a shadow on the likely gains in the business. Though LME aluminium prices are down five per cent from its recent peak, it is still about $100 a tonne higher on sequential as well as year-on-year basis. Likewise, copper treatment and refining charges and prospects for Novelis remain healthy. Clarity on the mining issues should provide direction to the stock.