Jiangxi Copper net falls as costs rise

PUBLISHED : Wednesday, 24 October, 2007, 12:00am
UPDATED : Wednesday, 24 October, 2007, 12:00am

Jiangxi Copper, the mainland's largest copper smelter, said third-quarter net profit fell 16.1 per cent despite sharply higher turnover, as higher material costs ate into profitability.

Net profit fell to 1.25 billion yuan from 1.5 billion yuan a year earlier, as turnover jumped 52.2 per cent to 11.26 billion yuan, based on mainland accounting standards.

Operating profit margin tumbled to 13.4 per cent from 24.7 per cent.

The higher turnover was due to higher sales volume and prices, while costs grew because of higher volume and unit costs of materials, the company said in a statement to the Shanghai stock exchange.

Nine-month net profit tumbled 8.7 per cent year on year to 3.25 billion yuan, as turnover climbed 59.3 per cent to 28.56 billion yuan.

Analysts warned of a further squeeze on profit margin due to tight global supply of the raw material copper concentrate, which Jiangxi Copper increasingly imports and processes into refined copper used in the mainland's fast-growing power and construction sectors.

'Despite Jiangxi Copper's ambition to purchase copper mines, a tight global copper concentrate market and limited copper resources in Jiangxi province may make it difficult for it to make large-scale copper mine acquisitions at reasonable prices,' Lehman Brothers analyst Oliver Du wrote in a research report.

He estimated Jiangxi Copper's copper concentrate self-sufficiency ratio would fall to 24 per cent next year from 29 per cent this year, as the company expands its annual smelting capacity to 700,000 tonnes from 500,000 tonnes.

Mr Du forecast the tolling and refining margins earned by the company for next year, which are normally settled through negotiations with overseas concentrate suppliers in late November or early December, would decline by 8 per cent, given the concentration of global copper resources in the hands of a small number of miners.

Lower tolling and refining margins mean higher costs and lower profit margins for Jiangxi Copper, whose turnover comes mostly from concentrate smelting. This means its profit has been eroded even as the three-month London Metals Exchange copper futures price rose 22.6 per cent since the start of the year to US$7,760 a tonne on the back of strikes in Central America mines and strong demand from China.

'Being essentially a copper smelter with further deterioration of copper concentrates self-sufficiency amid capacity expansion, Jiangxi Copper's smelting operations would be in the red due to likely low 2008 tolling and refining margins,' Mr Du wrote.

Jiangxi Copper is estimated to record a 2.68 per cent growth in full-year net profit to 4.74 billion yuan this year, and a 3.08 per cent net profit rise next year to 4.89 billion yuan, according to 21 brokerage analysts polled by Thomson First Call.

The company's H-share price, which has gained 242.9 per cent in the past year, bucked the rising share market yesterday, falling 1.4 per cent to HK$28.25 ahead of the results.