Paranapanema SA (PMAM3), Brazil’s biggest refined copper producer, is positioning itself for a pickup in demand by reducing costs and boosting profit margins.
The company based in Dias D’Avila, Brazil, which lost money in the past two years, is working on a plan to reshape operations and increase cash generation, said Christophe Akli, who took over as chief executive officer on Oct. 28. Paranapanema is seeking greater efficiency in areas such as logistics and labor, while assessing new project opportunities, said the former Louis Dreyfus Commodities BV executive.
“We have started working on redesigning our organization,” the 51-year-old French national said in an interview in Rio de Janeiro yesterday. The company is seeking “the proper balance-sheet structure and funding for whatever project that lies ahead,” Akli said.
Paranapanema, which supplies more than 60 percent of Brazilian refined copper demand, forecasts consumption growth of 5.4 percent to 465,000 metric tons next year driven by demand from infrastructure projects, compared with an estimated 4.8 percent this year, according to an investor presentation delivered yesterday. The refiner posted annual net losses in 2011 and 2012 amid a stronger Brazilian real that increased imports’ competition and plant stoppages.
The company’s shares rose 41 percent in the past 12 months, the third-best rally among 71 stocks in the Brazilian Ibovespa Small Cap index, according to data compiled by Bloomberg. The stock rose 2.2 percent to 5.20 reais in Sao Paulo today. Since tumbling to a three-year low on June 24, copper regained about 8 percent in New York.
While China, the biggest copper user, is facing lower economic growth in the next few years, copper demand is not showing signs of weakening, Chief Financial Officer Mario Lorencatto said during the same interview.
“The dragon is still hungry for copper,” he said. “The physical market is still very strong.”
Both European and U.S. copper customers are also showing signs of improving demand, Lorencatto said, adding that Brazil demand will benefit from government’s plans to boost infrastructure projects.
“If Brazil is really serious about sustainable growth, it would have to invest in infrastructure,” Lorencatto said. “And when that happens, copper demand will have to grow as it goes hand in hand with infrastructure investments.”
Paranapanema’s turnaround is already showing signs of progress. Revenue rose 46 percent in annual terms in the third-quarter to 1.3 billion reais ($568 million), the highest in at least 17 years, while gross profit margin doubled to 11 percent, according to data compiled by Bloomberg.
The company is expected to return to annual profit this year thanks to improved operations, an increase in productivity and the expansion of the Brazilian economy, said Luiz Caetano, an equity analyst at Planner Corretora de Valores, who has a buy recommendation on the stock.
“There will be profits already this year and that should grow substantially in the incoming years,” he said by telephone from Sao Paulo. “Things are in place, now we need the results to appear.”
Paranapanema, which earlier this year suspended plans to sell as much as $400 million in its first international bond issuance, is seeking to lengthen the maturity of its liabilities as profits grow, CFO Lorencatto said.
“We want to take advantage to extend payment terms and migrate some short-term loans to long term,” he said, declining to comment on the possibility of selling bonds next year.
The new management team is focused on strengthening the business model rather than possible offers for the company after a failed takeover bid by Vale SA (VALE5) in 2010, CEO Akli said.
“We will be doing our job looking inside the company,” he said. “If one day somebody comes with a wonderful check to our shareholders, we would be very happy because it would be the recognition of this team having done a good job.”
Paranapanema’s copper smelting facility in Dias D’Avila is worth “something north of a billion dollars,” Akli said. That’s above the company’s market value of $711 million.
“Today to ensemble a smelter it would take lots of money, time and headaches,” he said. “It would take a big effort for a newcomer to put such an infrastructure in place. One day, eventually, the market would have to pay for that.”
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