Vedanta hit by downturn

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Vedanta Resources, the India-focused zinc and copper miner, showed its vulnerability to depressed base metals prices, with earnings falling sharply during the quarter ending in December.

The group on Wednesday announced earnings before interest, taxation, depreciation and amortisation down 98 per cent from $671.5m last year to $10.1m this year.

However, the company’s market valuation was resilient compared with peers such as Xstrata and Rio Tinto, indicating investor warmth to Vedanta’s claim that its production costs are falling alongside commodity prices.

In its third quarter Vedanta produced record amounts of zinc and aluminium when the bottom fell out for those metals’ prices. Quarterly revenues from zinc, one the hardest-hit base metals because of its use in automobile manufacturing and high-end stainless steel products, fell 55 per cent year-on-year to $192m.

This contributed to an overall 31 per cent decline in quarterly revenues from $1.89bn to $1.31bn.

The cost of producing both copper and aluminium fell by more than 15 per cent, however, between the second and third quarters. Zinc is expected to follow suit this year, the company said. Vedanta already has some of the lowest production costs of any FTSE 100 miner.

“This will significantly help Vedanta mitigate any margin pressure due to prices,” said analysts at MF Global, the commodities broker, who rated the stock a “buy”.

In cutting their stock recommendation to “underperform”, Cazenove noted the company is “running at a worrying level of cash burn”, showing no sign of reducing planned capital expenditure.

But concerns over debt seemed uppermost in mining investors minds on Wednesday. Vedanta shares, most of which are owned by Anil Agarwal, chairman, fell 1 per cent to 598p. Xstrata shares fell by 10 per cent on concerns that an emergency fundraisings is needed to cope with high debt levels.

Credit Suisse estimates Vedanta’s net debt at $581m in its fiscal 2008 year, compared with $15.7bn for Xstrata and $40.7bn for Rio Tinto.

Vedanta said on Wednesday it had cash of $5.3bn.

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