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Headwinds for Hulamin

Unreliable energy supply contributed to a tough first half, but the company expects the situation to improve going forward.

It’s not easy being an industrial business in South Africa at the moment. Hulamin reported results for the first half of 2015 (ending June) which were materially worse than the prior corresponding period.

The impact of load curtailment by Eskom was particularly evident in these results. As CEO Richard Jacob stated at the results presentation, electricity makes up only one-third of Hulamin’s energy requirement, “But without it, we don’t move.” This led to a 15% decline in sales volumes, which fell to 187,000 tonnes.

Eskom imposes load curtailment on the business in two forms: Stage 1, sees energy use having to drop by 10%. Stage 2, by 20%. As with retail consumers, these curtailments are imposed in the same way as load shedding, which means there is no prior warning as to when curtailments will be imposed, even if you are spending roughly R600m a year on energy.

The company’s problems were also compounded by an accident at the SAPREF refinery in April, which supplies the bulk of its compressed natural gas – the source of the other two thirds of its energy. The accident resulted in a fatality which led to the closure of the refinery, and forced the company to import the bulk of its gas requirement.

This all led to a horrible set of numbers. Revenue was slightly down (R3.93bn vs. R4bn) largely due to the saving grace of the Rand, which depreciated by 11.30% to average R11.92 over the period. Operating profit fell by 34% to R138m, and net profit was 42% lower at R76m. Headline Earnings per Share (HEPS) was down 39% to 25c per share. The dividend was maintained.

Ominous clouds loom on the horizon though. The London Metals Exchange 3 month price for aluminium has fallen below $1650/tonne, which according to Chief Financial Officer David Austin, “is below large swathes of the industry’s cost of production.” Exports from China have ballooned in recent years, and the country’s ability to move up the value curve. Last year Hulamin applied to the Department of Trade and Industry (DTI) for tariff protection against imports that appear to be dumped as China’s idle aluminium capacity attempts to find a new home. (Utilisation of smelting capacity in China is estimated to only be at 70%).

But there are positives. The company will benefit from the extension of the African Growth and Opportunity Act (AGOA) which gives it import free access to the United States. It has completed the acquisition of the Bayside Casthouse as part of the Isizinda Consortium, which will provide it with the rolling slab it requires to manufacture its rolled products. This became effective on the 1st of July, following approval by the Competition Commission.

Finally, the Aluminium Recycling Plant is in ramp-up and should begin to generate cash flows in the next year or so. The company will source input material from scrap, “skeleton” waste from Nampak, and its own internal waste. This should allow it to benefit from the huge shift to aluminium cans in the packaging of alcoholic beverages. Clouds overhead, but there are some bright spots on the horizon.

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