Posts Tagged ‘australia’

Vodafone steps up to the plate, backed up by Emerging Markets

vodafoneLast week Vodafone Group (NYSE:VOD) released an interim management statement that considering the current economic climate, I consider to be pretty upbeat. I have been a long term holder of Vodafone stock on the London Stock Exchange & have over the last year traded the NYSE traded ADR up & down on swings. However with the current market, I am now looking for some growth & value plays. Looking a little closer at the report & doing some quick analysis of some of the major themes contained, I am now quite bullish on VOD going forward & will be picking up some shares for my investment portfolio. As of writing Vodafone was trading at £121.00 in London & $19.64 in New York.

Comment from : Vittorio Colao, Chief Executive

“In the first quarter the service revenue trend in Europe was consistent with the previous quarter and we continued to see good growth in India and South Africa. Our total communications strategy is delivering well, with organic data revenue up 19% and organic fixed line revenue 7% ahead of the comparative period. Free cash flow generation was strong at £1.9 billion, up 21%. The Group has reaffirmed its guidance for the full year.”

Highlights from the report :

  • Group: Revenue £10,743 million, up 9.3%
  • Group data revenue of £888 million, up 19.4% on an organic basis
  • Free cash flow of £1,896 million, up 21.2%; net debt at 30 June 2009 of £31.2 billion
  • Cost reduction programme on track
  • Proportionate mobile customer base of 315.3 million; 8.0 million net additions during the quarter
  • Europe: Service revenue up 4.4% driven by FX benefits. Data revenue up 17.8%. Fixed line revenue up 5.7%
  • Africa & CEE: Service revenue up 26.3% including Vodacom acquisition,Vodacom organic growth of 5.2% offset by weakness in CEE
  • Asia Pacific and Middle East: Service revenue up 21.8%
  • India service revenue growth of 23.0%

Interesting to see Vodafone making a point of mobile data revenues & 19.4% grwoth is a pretty impressive statistic. Much of this being driven out of Europe, where one of the big booms in mobile data is the popularity of 3G wireless broadband dongles (USB sticks) on “Unlimited” packages, which all the major operators have adopted. Vittorio Collao announced a major cost cutting initiative last November 2008, targetting cost reductions of $1.45Bn by  the end of the 2011 financial year in order to offset the pressures from inflation and the competitive environment and to enable investment in revenue growth opportunities. Savings of more than 65% of this target are expected to be generated by the end of the current financial year.

Vodafone has been at the forefront of network sharing, originally this started in the UK with Orange, now the group has signed a pan-European deal with Telefonica-O2, which will see network sharing being implemented in Germany, Ireland, UK & Spain. Analysts see this as a huge positive, as the deal is set for a ten year term & should save each company in the region of $350 million per annum. The growth figure of 8 million subscribers runs in line with analysts global forecasts for 2009 of circa 13%, as Vodafone is one of the higher value operators in each of its markets, the fact that it is expanding subscribers in a high churn market is positive.

“Old” Europe is the only area where Vodafone operates both fixed & mobile services, predominantly in the UK, Ireland, Spain, Potugal & Germany, where it is the second largest provider of broadband via its Arcor business unit. Having already discussed the cost savings initiative with Telefonica, the main story here is on how Vodafone are manbaging to reduce churn & promote ARPU via new services. Vodafone is far & away the leader in all of these markets regards business services (excepting Germany, which is dominated by T-Mobile), with consumer playing a strong supporting role, crucially the majority of these accounts are postpaid, which is reflected in higher service revenues than is the norm in this sector.

Another area that Vodafone is finally catching onto is the machine-to-machine market, or M2M. The company has made some recent investments in this sector & is set to benefit as the market grows from $4.2Bn in 2008, forecast to rise to $12.5Bn by 2012. It’s not all good upbeat news though, as recent EU intervention in roaming charges has had a detrimental effect on voice service revenues aceross the board. Retail termination costs have hit this part of the business very hard, with only Netherlands showing minimal growth of 0.6% mainly due to MVNO operations, whilst at the other end of the scale, Greece voice revenues sank by 15%.

In “new” Europe (CEE) & Africa, the atypical Emerging Markets,  we are presented with a mixed bag, however the region saw service reveues grow by 26.5%, mainly due to Vodacom (of which more later). Vodafone has seen serious competition in Romania, where no less than 6 operators are competing for one of the lowest ARPU generating populations in Europe, the situation not being helped by the extremely poor performance of the Lei versus the Euro. Similarly, Turkey has not been the shining star that Vodafone had expected when it launched their in 2005. However, now that 3G services are finally being launched, Collao today announced that the company would be investing up to $675 million in network infrastructure over the next 12 months, as Turkey has very low fixed line connections, mobile broadband is set to be a revenue enegine. I also have a feeling that as & when Turkey accedes to the EU, plenty of “rural” grant funding will be made available for the three network operators to provide near 100% coverage. At time of writing, there are some rumours of Turkcel & Vodafone entering into limited network sharing on 2G (GPRS) services, but these remain unconfirmed.

Meanwhile, Africa has seen a real boost this year, with Vodafone finally acquiring a majority interest in Vodacom South Africa from Telkom, as we discussed earlier this year in Consolidation hits Rainbow Nations telecom sector; Vodacom is now the flagship Vodafone brand in sub-Saharan Africa & has recently listed on the Johannesburg Stock Exchange. Another hit in this region is Vodafone’s 40% majority holding in Kenya’s Safaricom. Jointly the two companies launched the mobile payment platform M-Pesa back in 2007 & it has gome through a number of modifications & upgrades since then, winning a United Nations award along the way. The service has 5.75 million users signed up in Kenya & now that it has been proved & tested, look to Vodafone to launch M-Pesa in a number of new regions in Africa, such as Nigeria, Ghana & South Africa. An interesting video on Safaricom & M-Pesa can be viewed here : Michael Joseph

Vodafone’s controversial investment in Essar , seems to be paying off handsomely, as the Indian carrier now operates in all 26 mobile circles across the sub-continet. Service revenues jumped by 23% with the subscriber base leaping 56%, or  by 77 million subscribers in the last year. Vodafone will also be launching M-Pesa in India this year & it is thought that up to 17% of the subscriber base will ustilese the m-payment system. Vodafone-Essar recently applied & was granted both a national Internet Service Provider & National Long Distance licences, from the Indian Government, as expectations run high on the “last mile” being finally opened. The NLD licence will have an immediate effect, as Vodafone will now be able to backhaul its own national STD voice traffic & not have to rely on local carriers, which will be a welcome development since mobile voice terminations have fallen by 5% in India in the last year.

In Asia Pacific, there is only one big story & that is the merging of Vodafone Australia & Hutchinson Whampoa’s 3 in order to create a realistic competitor to government owned Telstra. The new Vodafone-Hutchinson Australia is a 50-50 JV, which will carry the Vodafone brand & now has a combined cutomer base of just over 6 million users. Vodafone will be looking to leverage its Vodafone Live! content platform here & significant cost savings on network (roaming charges) can be expected, the combined networks now have 98% coverage of metropolitan areas across the country. Vodafone will also receive a deferred payment of AU$500 million from Hutchison-Whampoa, to reflect the difference in the joint business assets (network).

So all in all, a home run for Vodafone in its first quarter of the current financial year. Considering the global economic environment, I feel that this is a great performance (although possibly helped along by currency rates) & that if the management team can keep a firm grip on the operating companies, Vodafone should be one of the strongest performing telecoms companies for 2009-2010. Continued expansion in both India & Africa, along with the introduction of services such as M-Pesa will attract & hold valuable customers. I’m long on the ADR, having bought in last week at $18.68 & am looking for it to exceed $23.50 within three months.

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More pain for the dollar as China & Australia line up FTA ?

Australia China Free Trade AgreementWith China having superceded Japan as Australia’s biggest trade partner last year, the proposed Chinalco investment in mining giant Rio Tinto, could soon be part of a much larger strategic effort by the two nations, that ultimately could be a threat to the US dollar. Today, The Australia China Business Council released an independent study that shows a successful bilateral trade agreement with China would boost Australia’s gross domestic product by A$146bn ($114bn) over 20 years.

China has been on an extended spending spree for the last 18 months, with it making strenuous efforts to acquire shares in strategic assets regarding mineral & energy deposits. With China making investments in operations in South America, Africa, Australia & Central Asia, all paid for with USD from its estimated $1 Trillion cashpile.

“The Australia China Business Council has long advocated increased liberalisation between Beijing and Canberra, and this report confirms our view that a comprehensive agreement would yield major results for the Australian economy,” ACBC national chairman Frank Tudor said in a statement.

China became Australia’s largest trading partner in 2008, with two-way merchandise trade totaling A$57.92 billion. Australian exports of agricultural, mineral & energy products were valued at A$26.93 billion while imports from China of A$31.00 billion comprised manufactured products including computer & electrical equipment, industrial products & clothing. Canberra and Beijing have held 13 rounds of talks on a trade agreement over the past four years, with both parties seemingly keen to expand trade.

As we reported a few weeks ago, China is now looking to accelerate its nuclear energy program, with officials announcing they would begin construction of an additional five extra power plants this year on top of the 24 already under construction and 11 already in operation. As we previously noted, both Rio Tin to & BHP Billiton would be the major benefactors in any increase in uranium requirements from China. With uranium channeling higher on global markets, analysts are bench marking $70 per pound later this year, uranium exports from Australia could be worth $12 Bn a year in the near future.

Beijing has recently put in place currency swaps with Hong Kong, South Korea, Indonesia, Malaysia, Argentina & now Brazil. The purpose of the swaps varies from county to country. But the main benefit is that China can conduct more of its trade using its own currency and not the USD. It could also be argued that it is operating vendor financing deals in which China supplies currency to countries from which it buys a huge amount of commodities. Nouriel Roubini wrote an interesting piece recently in the New York Times, where he argues that the renminbi, although not an internationally traded currency, seems to have aspirations to become one.

Any uptick in Ozzie-Sino trade would seem to make a currency swap deal a foregone conclusion, Australia is now inextricably tied to the Chinese economy, as exports to China have increased on average by 24.8 percent annually over the last 10 years. Lets not forget that Chinalco is a government owned operation & the proposed deal would be China’s largest Foreign Direct Investment, worth a potential $19.5 Bn.

To conclude, each factor on it’s own is not enough to spark off fears that the renminbi will be all powerful in the very near future. However, where I come from there is a saying “many a meikle makes a muckle” & the Chinese strategy should not wholly be ignored. If, as I contend, Australia & China head down the path of trading in each others currency, this will be the start of something big.

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Miners to benefit from change to Indonesian law

copper-miningUnder Indonesian law, foreign mining companies operating in the country are required to sell 51% of their local holdings back to the government after 5 years of commercial operation. However, Newmont (NYSE : NEM), will only be asked to relinquish 17% of its subsidiary, PT Newmont Nusa Tenggara (PTNNT), as 20% of this entity is already held by a local partner. An international arbitration panel on March 31 gave Newmont and minority partner Sumitomo Corp. a 180-day deadline in which to divest 17% of PTNNT to local buyers, ruling that the companies were in default of their contract of work for failing to meet divestiture schedules in 2006-2008.

With the Indonesian government estimating the total value of PTNNT at $4.9Bn , Newmont & Sumitomo are locked ina valuation battle with the governmet & local companies, who are keen to pick up a share in the companies gold & mining concerns. Some 10% of PTNNT is earmarked for regional governments in Sumbawa, the location of the company’s Batu Hijau copper and gold mine, and the central government will have first right of refusal on the rest of PTNNT.

“We are still discussing the pricing formula” for the stake in PTNNT, with other government departments” Bambang Setiawan, director general at the Department of Energy and Mineral Resources “the department is also conducting preliminary negotiations with Newmont over the sale of the unit as yet it is unclear when a deal might be reached.”

It’s not all grim news for Newmont though. This week, Indonesian officials met regards mining rights in areas of protected forest. As we have written before, (Indonesia the long road back), The country has vast natural resources that Indonesia is keen to exploit, using the above formula to develop modern facilities in the country. Now ministers are expected to pass a decree that will allow mining companies to carry out underground mining activities in areas of protected rainforest.

“The presidential decree will give legal basis so that underground mining is allowed in protected forest areas.The existing law only forbids open-pit mining in protected forest areas,”  said Setiawan.

Information from the mining & energy ministry show that Indonesia has mineable nickel reserves of 547 million tonnes, 112 million tonnes of bauxite and 43 million tonnes of copper,  tin stand at 336,911 tonnes, measured in terms of refined tin, while gold reserves were 4,341 tonnes,

Two other mining majors that will also look to profit from this law change are Rio Tinto (NYSE : RTP) & Freeport-McMoran (NYSE : FCX).

Rio Tinto is currently looking to develop a new nickel operation on the island of Sulawesi, Rio estimate that the mine could produce up to 46,000 tonnes of nickel metal a year, estimated investment costs stand at $2 Bn. Sulawesi is densely forested & the change in law should mean that the company can expand its operations significantly.

Meanwhile, Freeport-McMoran has been active in Indonesia for a much longer time. PT Freeport Indonesia has operated the Grasberg mining complex since the early 70’s, Grasberg is one of the world’s largest single producers of both copper and gold & as Freeport claims, contains the largest recoverable reserves of copper and the largest single gold reserve in the world. Grassberg will continue surface mining until 2015, at which time it will then begin sub-surface mining, according to Freeport’s website.

Indonesia looks to be well on the way to attracting large amounts of FDI into its commodity sector, providing an economic boost to local populations spread across this vast country. India & The Emirates have already committed to investing $4Bn into an aluminium smelting plant, with fully integrated power & logistics last year, with the relaxation of the rules governing mining concessions, the country could well benefit from China’s projected expansion.

BHP & Rio Tinto to extract billion dollar contracts as well as uranium

australian-flagAustralia could be looking at a new multibillion-dollar export market as China looks for a steady supply of uranium, which it needs to underpin a massive expansion in its nuclear power industry. Chinese officials this week announced they would start building five extra power plants this year on top of the 24 already under construction and 11 already in operation. Australia could add A$17 billion ($12 billion) to gross domestic product by 2030 by maximizing suppliers to meet rising global demand for nuclear energy, the Uranium Association said last month.

The acceleration of China’s nuclear programme stems from mounting concerns about climate change, energy security and the more immediate task of kick-starting the economy as part of the Government’s 4 trillion yuan stimulus plan.

Vice-Premier Zhang Dejiang announced at a Beijing conference this week that China would “accelerate the development of nuclear power and increase the ratio of clean energies like nuclear power”.

Analysts say the country’s dearth of uranium is “the tiger in the road” to fulfilling its nuclear power ambitions and that Australia is the most obvious solution.

“There are not enough uranium resources in China to support the aggressive nuclear power development plan for the next 20-30 years,” said Professor Liu Deshun, of China’s Institute of Nuclear and New Energy Technology. “Australia has the uranium resources that could be exported and in China we have the demand,”

Chinese companies are lining up to invest directly in Australian uranium mining & exploration companies and have begun signing long-term supply contracts with Australia’s established mining companies, betting on the expansion plans receiving Government approval.

Australian Minister for Resources, Martin Ferguson, indicated the Federal Government was unlikely to stand in the way, subject to environmental and investment tests. Today, ERA (Energy Resources Australia), a Rio Tinto (NYSE : RTP) subsidiary, is expected to say more about a new plant to extract uranium from low-grade ore and an exploration pit for the expansion of its Ranger Mine in Kakadu, which already produces 10% of the world’s uranium.

Next week BHP Billiton (NYSE : BHP) will move a step closer to a massive expansion of its Olympic Dam mine in South Australia, the world’s biggest proven uranium reserve , with the release of an environmental impact assessment. Extending into the Yeelirrie deposit in Western Australia, which is estimated to  have a 10 to 12-year lifespan and a resource of 35,000 tonnes of uranium, will put BHP at the head of the pack, when it comes to talks with the Chinese buyers. This as a result of the WA government lifting a siy year ban on uranium extraction in the state.

Chinese analysts have said the country’s nuclear power expansion plans will not succeed unless China secures the necessary uranium supplies. Australian analysts say the local mine expansions are unlikely to proceed without the certainty provided by long-term supply contracts to China.

“The two go hand in hand,” said John Wilson, uranium analyst at Resource Capital Research.

Uranium was trading at $41 per lb yesterday & now analysts are benchmarking the yellow cake as being able to reach the $70 per lb mark in the near future.

Zambia : follow up on Lumwana copper mine

lumwana

President Rupiah Banda of Zambia, Africa’s biggest copper producer, said on Friday foreign mining firms should set up copper processing facilities to process finished products for export. Banda was speaking in Solwezi, 700 km northwest of the capital Lusaka, where he commissioned the Lumwana copper mine, a unit of Australia’s Equinox Minerals Ltd (EQN.TO: Quote) (EQN.AX: Quote).

As we reported earlier (All that glitters is not gold) copper production is expected to peak at 170,000 tonnes at the mine this year.

“What the government expects is for foreign investors in the mining sector to consider investing in metal processing facilities that add value to your metal,” the state-run Zanis news agency quoted Banda as saying. “Time is ripe for investors to consider processing the copper and add more value by selling finished products made in Zambia to the international market.”

Banda said his government would provide the necessary support to investors seeking to process copper in a bid to raise more revenue and create jobs.

Zambia has previously provided tax relief on imported equipment and machinery and also waived a 16 percent value added tax to investors in the mining sector to woo more foreign investments.

Banda hailed Equinox Minerals for continuing to develop the Lumwana copper mine even when the global financial crisis was affecting the operations of the industry following a slump in world metals prices.

Banda said Equinox Minerals had spent $1 billion developing the Lumwana mine in 12 years, including a new town in the area.

“This shows the trust (Equinox Minerals) has in our mining industry regardless of the ups and downs,” Banda said.

Copper mining is Zambia’s economic lifeblood and the mines are a major employer in this country of 12 million people.

Courtesy of Reuters

Chinese raw material companies continue on acquisition trail

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Macquarie Group flexes muscles at home & abroad

maconly

Sydney quoted Macquarie Group  (ASX – MQG) is currently involved in two major plays, one domestic & one in China. Macquarie functions as a non-operating holding company with seven different segments : Financial Services, Adisory Services, Private Wealth, Funds Management, Banking & Securitization, Treasury & Commodities & Equity Markets, yielding a market cap of  A$ 8.9Bn, at todays closing price of A$29.50. Macquarie has traded at a 52 week high of  A$82.20 & a low of A$20.08.

 

Possibly bolstered by Moodys recent Aaa rating for its fixed backed bonds, traditionally bullish Macquarie are involved in a potential takeover of ailing Citigroups Australian operations, as reported  in the Australian Financial Review. The acquisition would bolster Macquarie’s position as the largest full service retail in Australia with about 430 advisers, Citi Smith Barney, the retail stock broking and wealth management unit, had sales of more than A$150 million ($100 million) and net profit of A$21.4 million last year.

Further away from home, Macquarie has signed a deal with China’s Hengtai Securities, which will allow Macqaurie to realise access to the potentially lucrative capital markets, which are currently valued at $70Bn per annum. The deal would see the Australian investment firm take a 33% stake in a joint venture. Hengtai, based in Hohhot, Inner Mongolia, owns more than 30 outlets in Shanghai, Beijing, and Shenzhen. Its businesses include stock underwriting, stock trading, brokerage and fund management

‘Macquarie is less affected by the crisis and China’s capital markets still have huge potential to grow,’ said Liang Jing, analyst at Guotai Junan Securities Co. ‘So it’s understandable that Macquarie wants to be in China for long-term growth.’

China pledged on Saturday to quicken reform and innovation of its capital markets to lay the groundwork for future growth. Such reforms included expanding the corporate bond market, launching NASDAQ-style start-up boards when appropriate and developing real estate investment trusts (REITs) on a pilot basis.

China has in the past year tightened approval on securities joint ventures. So far, Morgan Stanley, Goldman Sachs, UBS AG ,  Credit Suisse AG  and CLSA Asia-Pacific Markets have obtained licences to operate in China. Macquarie, which offers banking, investment and fund-management services, has been investing in China’s residential real estate for more than a decade.