ENRC rejigs expenditure to focus on quick wins

Although manufacturers continue to grumble about rising raw materials prices, ENRC begs to differ, with the diversified miner saying revenue declined sharply in the first nine months of 2012 due to lower selling prices for its principal commodities.

The fall in prices for iron ore and ferroalloys had the greatest impact, declining by 26% and 8% respectively. Revenue was further dented by lower sales volumes of ferroalloys, chrome ore, iron ore and alumina.

"Market conditions and the current pricing environment remain challenging," admitted Felix Vulis, Chief Executive Officer of the Eurasian Natural Resources Corporation (ENRC).

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

"The outlook for the global economy continues to be defined by uncertainty, leading to weakness, particularly in pricing. Together with the build-up of ferroalloy inventories in China, currency moves have created cost opportunities for South African ferroalloy producers, leading to the market experiencing oversupply and resulting in weaker spot prices. We expect this trend to continue through to the year end. Regarding iron ore, we do not foresee any material change to pricing before the year end," Vulis added.

The Ferroalloys division operated at close to full pelt during the first nine months of the year. There was a change in the geographical sales mix, with an increase in sales to China as demand slackened off in Japan, Western Europe and North America.

In the Iron Ore division, revenue showed "a very significant deterioration" compared to 2011 due to a sharp decline in sales prices. Total sales volumes saw a modest decline compared to the previous year. The share of higher priced pellets sold also decreased, thereby reducing revenue, although this was partially offset by higher sales of screenings in 2012. During 2012 the group increased its sales of iron ore to China and within Kazakhstan. Production was slightly lower than in 2011.

The top line has also been heading down the page at a steep angle in the Alumina and Aluminium Division as well, due to a 19% decline in the London Metal Exchange average price for aluminium over the period and lower alumina sales volumes as a result of the production shortfall in the beginning of the year. Alumina production returned to full capacity in June 2012. Aluminium production was in line with the previously reported period.

The cost of sales increased only moderately compared to the first nine months of 2011, the group revealed, while net debt of $3.86bn was up from $3.41bn at the end of June. Estimated capital expenditures for the full year in 2012 will be in the region of $2.2bn, of which $0.6bn relates to sustaining capital expenditure.

"Our comprehensive review of capital expenditure is now complete, with a clear plan to focus on those projects that will be cash generative in the near term," Vulis said.

The expansionary programme has prioritised projects with both the highest returns and shortest payback periods, with the group's focus being on the completion of the New Aktobe Ferroalloys Plant and the development of both the Frontier and RTR copper projects in the Democratic Republic of the Congo.

Owing to shifting priorities, work on the Boss Mining Concentrator will be delayed by a year, and there will also be a delay in expansion at SSGPO in Kazakhstan until 2015.

These five key expansionary projects will absorb $3.2bn of the money the group has set aside for expansion, of which $1bn is expected to be spent in 2013.

With the pricing environment looking grim, management continues to focus on cost control. Unit cost growth year-on-year, including Mineral Extraction Tax, is expected to rise for Ferroalloys by up to 5% and for Iron Ore, Alumina, Coal and Electricity by between 10% and 15% in 2012.

JH