Nalco rides high on bauxite

The last quarter of 2016 helped mining and metal companies witnessed a reversal of fortune as inventories decreased and metal prices rebounded slowly but steadily. Metal stocks started soaring, as investors participated actively on expectations of better times ahead.

National Aluminium Company (Nalco) shares not only more than doubled last year but also hold good prospect in the current year. The company works through the upstream business of the aluminium value chain starting from bauxite mining, alumina refining and selling, and aluminium production.

Nalco is in an advantageous position in comparison to its competitors because of its bauxite benefits.  Nalco is the biggest bauxite miner in India and produces about 6.3 million tons of bauxite from the Panchpatmali mine.  However, the company has posted 16.8 per cent growth in its bauxite production in the April-February period of FY 2016-17, to reach a production volume of 6.56 million tonnes in eleven months.  The company is optimistic about crossing their bauxite production target for FY 2016-17 and in tandem with bauxite production, cast metal production grew by 3.79 per cent and the aluminium metal sales grew by 2.68 per cent at its Angul aluminium smelter.

Projected increase in aluminium supply and demand in India and consequent increase in alumina and aluminium sale volume and prices are expected to aid Nalco’s prospects as it is an integrated aluminium producer. The balance sheet of the company is bullish with a cash balance of ?4,600 crore as of September 2016. Nalco has good earnings prospects, boosted by global higher aluminium prices which translate into margin improvement and earnings growth.

LME aluminium prices jumped nearly 30 per cent last year — from under $1,500 a tonne in April 2016 to over $1,900 per tonne currently. This was aided by unexpectedly good demand from China, alumina and aluminium capacity cut in the country, US infrastructure spending expectations and strong automobile sales.

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In India, the Government is considering ways and means to fight cheaper imports from China and Middle East. The Government is considering imposing minimum import price for certain categories of aluminium products. Increased local production of aluminium would boost alumina sale — a highly profitable segment for Nalco due to its abundant captive bauxite capacity. Nalco’s current free cash flow may be impacted due to new coal and power projects but, the investments will bring back better returns in the long run by bring down production cost.