Vedanta Managing Copper Operating Costs but at What Price?

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Non-ferrous Metals

Vedanta Resources, the London registered metals company with a strong Indian base, has come out with some ambitious growth plans, even though they posted results slightly below expectations, according to the Telegraph newspaper. Vedanta falls into that camp of miners and processors sitting on a strong balance sheet. At the end of 2008, the miner had cash and liquid investments of $5.2bn (£3.5bn), which were invested in bank fixed deposits and “high quality debt” mutual funds. Their modest debt of $860m is easily managed at less than 50% of the current market cap, compared to many in the industry, like Rio.

The firm’s focus on acquisition helps detract questions from too much analysis of operating details. Though the firm is well positioned for opportunistic purchases of struggling competitors or their assets, for example just this week the company moved to sop up the balance 20% of Madras Aluminium for what will prove a good price in the years to come, our concern is more about husbanding current investments.

Vedanta announced a dramatic reduction in operating costs at it’s copper operations in Zambia, reducing costs from $2.93 per pound to approximately $1.40 in March. Coupled with rising copper prices that makes the mines profitable again but raises concerns in our minds about how this is achieved. Vedanta bought out the old Konkola Mining division from Anglo American and we understand from industry contacts that profitability has often been an issue. The problem Vedanta has is that Konkola is a rather complex mine. It uses a large amount of power just for pumping as a tributary of the Kafue river runs through it and the ore body is well worked. Therefore it’s production costs are rather high compared to international standards. In addition, Vedanta are investing in excess of $500m for what is called the ËœKonkola Deep Project’ to sink a new deep shaft to extend the life of the mine by 22 years and access an additional 5.5m tons of ore. No details have been released by the firm as to how these current costs have been saved but after getting rid of miners, the next steps must have been a reduction in spares inventory, delays to scheduled maintenance, re-negotiation of supply contracts, cannibalization of equipment and where possible, power load shed, although basic mine safety becomes an issue because of flooding.

It raises the question how can they reduce costs that dramatically and ensure the long term viability of the mine ” the answer is they can’t indefinitely. It sounds like a case of borrowing from tomorrow to get through today.

–Stuart Burns

Comment (1)

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