Vedanta Resources has had a very good run if you look at the six month chart. At the end of August, it was at around 500 pence, with the price now a smidgin over 1100 after a steady run through the autumn and winter months. While, technically speaking, it is probably trading slightly at the high end over a three month basis, the fundamentals for this company still look relatively good when compared to the average S&P 500 stock.
The big question is whether traders are likely to see the same sort of upside in the next six months, or will Vedanta’s exposure to its core market finally drag it down? The company has produced good price/book and price/cash flow ratios and has a current dividend yield of about 3.4%.
Goldman Sachs seems to agree with The Armchair Trader, reaffirming their buy rating last week. Vedanta is heavily exposed to the natural resources sector, but is diversified across oil, gas and minerals rather than putting all its eggs in one basket. Traders will need to be aware of this natural resources angle when considering Vedanta, as the stock will be responsive to changes and reverses in medium to long term energy prices.
But there are some fundamental factors underpinning the success of Vedanta over the last six months. There have been falling production volumes within the group – for example, Zinc India, its subsidiary which mines zinc, lead and silver, reported a 15% fall in volumes for Q4 last year. However, bear in mind that many base metals prices are looking fairly cheap at the moment, and that miners have been voluntarily scaling back production in the face of this.
Copper prices are also looking more bullish – see our analysis on this market coming out later this week. Vedanta has accepted some operational challenges with its Copper Zambia business at the end of last year, but again, CEO Tom Albanese reckons the company is over the worst of these.
Vedanta is also in the process of absorbing Cairn India, the sub-continental oil and gas exploration company, of which it already holds 60%. Analysts say this will give the group access to some $3.5 billion in cash, which will do wonders for its debt problems.
Caveat emptor – Vedanta is heavily exposed to the natural resources sector, and this ride is never a smooth one. Albanese himself, a former boss of Rio Tinto, says investors should bear in mind that natural resources markets will correct themselves. It is, after all, a market driven by supply and demand: producers will turn off the taps or scale down production if prices get too low, and there has been quite a bit of that happening likely.
In the oil market, for example, we are moving into that sweet spot where oil becomes profitable for extractors, at $60-65bbl, but not expensive enough for the fracking operations in America to scale up again. It is very much a balancing act for producers, but we would expect the oil price to close the year a lot higher than it started.
Vedanta is also an Indian company, with major interests serving the Indian market. Having just visited India recently ourselves, The Armchair Trader was very impressed by the potential this country has as it continues to modernise. There has always been much talk about China’s prospects, but India has at least the population China has, without the demographic problems China faces, and with a more liberal economic model.
For those interested in Vedanta’s local cred, take a look at the $1 billion bond sale it auctioned last month to finance near term debt obligations (which its Cairn India acquisition may also help to banish). This issue was oversubscribed by $1.3 billion, which gives you some idea what the market thinks of its financial stability.
At the time of writing LON:VED had closed up 1.9% on the day at 1100.48. Brent crude was trading at $55.54.
Vedanta Resources is listed on London’s FTSE 250 Index. You can purchase shares through a stockbroker. You can choose your broker through our Broker Directory.