Western Mining net hit by hedging losses in first half

Lead miner Western Mining Co said net profit in the first six months of this year plunged 90 percent, after it incurred hedging contract losses of 100 million yuan.

The company said in its preliminary first-half earnings report to the Shanghai Stock Exchange that the losses were largely due to the sudden turnaround in non-ferrous metal prices in the second quarter, but did not disclose any further details.

Analysts speculate that the company's hedging losses were from its wrong bets on electrolytic aluminum futures contracts.

The lead miner is expected to post profits of between 40 million and 50 million yuan in the first half compared with 720 million yuan last year. The company attributed this to the shrinking demand for smelting and mining products and the hefty price falls in copper, lead, zinc and aluminum in the first half.

The surprise hedging losses, however, have not made much of a dent on the company's share price, which has risen nearly 131.5 percent in the past six months, compared to the industry average of 103.5 percent. Western Mining shares yesterday closed at 19.73, up 2.97 percent from Monday.

"The losses are irrelevant to its core business of zinc, lead, and copper and will not impact revenue in the second half, as the company has abundant mineral stocks," said Zhu Lida, analyst, Northeast Securities.

What's more, the reported hedging loss was small compared with the company's gain of 480 million yuan, or 80 percent of its net profit, from futures trading in 2008.

Western Mining has also obtained the license from the top securities regulator to trade its futures abroad in 2006.

"Many firms in the industry run hedge contracts to avoid risks during non-ferrous price hikes, but few made such big losses," said Lin Feng, investment manager, Guojin Wealth Management Center. So far, among other non-ferrous firms that have posted their earnings numbers, there have been no instances of companies plunging into heavy losses.

Three-month delivery copper on the London Metal Exchange gained over 80 percent this year to close at $6,000 a metric ton yesterday. Zinc and lead prices have also soared this year.

Many stock analysts believe that as an upstream company involved in raw material exploration, Western Mining would benefit from the persistent commodity price boom.

Given that China is not self-sufficient in copper, companies that have secured supplies such as Western Mining should have no problem in meeting the projected demand increase.

The zinc smelter based in northwest China's Qinghai province can reap the benefits of the ample natural resource in the area, said Guojin's Lin.

However, the company's average earnings per share (EPS) is estimated to reach 0.12 yuan in 2009, lower than industry level of 0.3 yuan. The firm's EPS in 2008 was 0.24 yuan.

"The production cost of the company's mines is much higher than its peers for the tough natural environment and inconvenient transportation system in the west. It should be several years before the company can expect rosy profits from its resources," Northeast Securities' Zhu said, adding that strong profitability can be expected in the long run.

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