Best Small Cap Boosts Profit on Copper Rebound: Corporate Brazil

Paranapanema SA, the refined copper producer that is Brazil’s best-performing small cap stock, anticipates boosting profit by expanding capacity to meet demand for air conditioners and solar power equipment.

Paranapanema is 65 percent through a 1.22 billion reais ($523 million) investment plan to upgrade and build plants. After two years of losses, the company expects margins and revenue to continue improving to levels compatible with bigger rivals such as Aurubis AG, said acting Chief Executive Officer Edson Monteiro and Chief Financial Officer Mario Lorencatto.

Demand for refined copper in Brazil, the world’s seventh-largest consumer of the metal, will rise 6.2 percent in 2014, twice this year’s estimated growth rate, according to a company presentation. Paranapanema is renovating its copper refining plant, opening a tube factory and studying the best location for a flat-rolled facility as it gains competitiveness in the domestic market after a depreciation of the real.

“As the new copper product factories come online, this is what has greater value that will provide a bigger increase in profitability,” Lorencatto said during an interview at Bloomberg’s Sao Paulo office on Sept. 4. “You can see the curve of the Ebitda margin, of revenue, clearly change levels.”

Since tumbling to a three-year low of $2.9855 a pound on June 25, copper regained 9.4 percent to $3.2610 at 5:46 p.m. in New York. Ebitda refers to earnings before interest, taxes, depreciation and amortization, a measures of a company’s profitability.

Rising Production

Paranapanema rose 112 percent in the past 12 months, the best rally among 73 stocks in the Brazilian Ibovespa Small Cap index, according to data compiled by Bloomberg. A small cap describes stocks with relatively lower market value. The company, Brazil’s biggest producer of refined copper, targets an output gain of 5.7 percent next year to 280,000 tons. Chile’s Codelco is the world’s largest producer with 1.57 million tons last year, followed by Hamburg-based Aurubis, with 1.16 million tons, according to London-based metals researcher and consulting company CRU.

Shares of Paranapanema gained 0.4 percent to 4.82 reais in Sao Paulo today, trimming the company’s decline in 2013 to 2.8 percent compared with Aurubis’s 16 percent drop in Frankfurt. Four analysts tracked by Bloomberg rate Paranapanema as buy, one recommends selling and one says hold.

Nascent Turnaround

Paranapanema, which sold 64 percent of its products in Brazil in the first half, is seeking to boost revenue in non-traditional markets such as wind and solar energy or air conditioning, Monteiro said. The company is developing products that may displace other metals such as aluminum or stainless steel in items from hospital equipment and handrails, said Monteiro, who took over as CEO in February. Paranapanema’s management is in Santo Andre, in the greater Sao Paulo region.

“We are looking for technologies that allow copper to enter into this market with an adequate competitiveness,” he said. “Builders will have more than one option.”

While a turnaround has been occurring, the company still has scope to improve its quarterly results, according to Daniel Utsch, an equity analyst at Banco Fator SA in Sao Paulo.

Pedro Galdi, head strategist at Sao Paulo-based brokerage SLW Corretora, who has a hold recommendation, said it’s too early to incorporate turnaround gains to the share price.

“Since it’s still in a transition phase, it’s hard to put value on big production increases,” he said in a telephone interview. “The company still needs some time to improve.”

Vale’s Bid

Paranapanema shareholders rejected a takeover bid from Vale SA, the world’s largest iron-ore producer, in September 2010 as a minimum acceptance level of 50 percent plus one share wasn’t reached. Vale had increased the offer four times to 6.75 reais per Paranapanema share, which valued the company at 2.15 billion reais. The stock fell to the lowest in almost four years in June 2012, reducing its market value to as little as 645 million reais, according to data compiled by Bloomberg. The company is valued at 1.53 billion reais as of yesterday’s close.

Paranapanema’s leading role in Brazil and its strategy may again position the company as a takeover target, CFO Lorencatto said during the interview.

“No one is flirting with us, but I imagine if you look at the sector for the transformation of copper, which is the company with the scale and efficiency that stands out?” he said. “If I want to participate in the sector, this company is attractive.”

Previ, Petros

Paranapanema’s top three shareholders are linked to the Brazilian government, including Caixa de Previdencia dos Funcionarios do Banco do Brasil, or Previ, Latin America’s largest pension fund. Together with government-controlled Caixa Economica Federal and Petros, the pension fund of state-run Petroleo Brasileiro SA, they own a combined 53.3 percent stake.

Previ declined to comment on its Paranapanema stake in an e-mailed statement, as did a spokeswoman for Petros. Caixa’s press office didn’t reply to an e-mail yesterday seeking comment.

Paranapanema is forecast to post net income excluding some items of 178 million reais next year, after recording a third consecutive annual loss of 206 million reais in 2013, according to a July 8 estimate by Fator’s Utsch. The company boosted second-quarter sales by 38 percent, seven times more than the

5.2 percent average increase of 16 peer companies, according to data compiled by Bloomberg.

Paranapanema posted a negative ebitda margin of 3.3 percent last year, compared with the 5.4 percent margin of Aurubis, the data show.

The company is cutting costs and undergoing a “significant recovery” in its profitability, Lorencatto said, declining to provide specific targets. “This should give us a boost up ahead. We still have a lot to do.”