Tesla deal shows plenty potential but no detail

Pietermaritzburg-based aluminium manufacturing specialist Hulamin caused a stir last year after it bagged an exclusive contract to supply Tesla with a key component to power its electric vehicles.

Investors, sensing a game-changing development, initially had dollar signs in their eyes. But the company’s reluctance to disclose details of the deal with Tesla’s Elon Musk has left some investors fretting. Some even questioned whether the contract might be an operational burden.

Recently management said it had secured a new three-year supply arrangement with Tesla, running from this year. But the deal remains shrouded in mystery as the company was unable to disclose details such as the value of the contract or long-term earnings that could flow from Tesla. This reticence is due to Tesla’s request for confidentiality.

But Hulamin did say it expected export volumes to at least double as sales of the electric car accelerated.

“Though the business is less than 5% of turnover, the product we develop is considered to be a high value-added line in our portfolio,” Hulamin said.

Last week Tesla announced an ambitious plan to produce 500,000 vehicles by 2018, two years earlier than planned. This is amid strong demand for its new Model 3 sedan. The new Tesla production target is six times this year’s expected output, according to international media reports.

A bit more disclosure could not hurt. Hulamin’s share has dropped more than 10% over the past year — reflecting a modest market capitalisation of R1.8bn for a company at the forefront of the country’s much mooted mineral beneficiation thrust.

The good news is chairman Mafika Mkwanazi had some positive comments for the first quarter of trading, stressing the energy supply and (planned) maintenance disruptions that caused a 7% drop in output to 198,000 t in the past financial year had not recurred in the first quarter of 2016.

The company undergoes planned maintenance every five years or so, which means a factory shutdown is unlikely for some time. More importantly, the planned maintenance improved efficiencies, setting a platform for volumes and sales growth.

Other developments that should boost net profit, which more than halved to R164m in financial 2015, includes securing additional export sales to its main markets in the US and Europe.

On the downside, the issue around protection against aluminium imports from larger producers from Brazil and China remains unresolved.

Recently, Hulamin said it was difficult to understand why the International Trade & Administrative Commission had not supported an application for an import tariff (as seen in the steel industry).

Then there is commodity markets’ volatility. Aluminium prices have recovered from recent lows, but are still far off their highs of $1,800 a year ago.

International aluminium producer Alcoa recently reported a plunge in net profit to $16m in the first quarter from $195m in the year earlier period.

“Hulamin is a small fish in a global pool,” said an analyst who could not be named due to company policy.

As a price taker it is difficult for Hulamin to create a competitive advantage, the analyst said.

Global Markets Research analyst at Rand Merchant Bank Isaah Mhlanga says the current oversupply of aluminium in China remains a risk for the metal’s outlook. He says the Chinese markets remain in oversupply as slower growth in demand from the property and manufacturing sectors weighs on consumption. “Sideways growth in the global manufacturing sector in the year to date, driven by the muted growth in emerging markets and major countries outside the US, will keep growth in consumption relatively muted.”

Mhlanga expects this will result in a negative impact on high-cost producers.

The Tesla deal, improved production efficiencies and increased export sales may safeguard against a significant decline in earnings in the 2016 financial year, but some analysts are not holding their breath.

Perhaps tellingly, one noted: “I have since dropped coverage of the company as the risk of holding the stock has become too high relative to the potential return.”