Rising Costs And Lower Earnings Will Impact Future Margins Amid Tightening Concentrate Market

Key Takeaways

• High CapEx spending and anticipated start-up losses may negatively impact free cash flow and earnings in the short term before growth occurs.
  
• Increased personnel costs, combined with refining charge pressures, could compress net margins and strain operating expenses moving forward.
  
• Strong operating results, strategic growth investments, and effective risk management suggest continued earnings growth and financial stability for Aurubis.

Catalysts

Processes metal concentrates and recycling materials in Germany.

• Aurubis anticipates a slightly lower earnings situation from recycling materials for the remainder of fiscal year '24/'25, largely due to pressures on refining charges, which could impact net margins.
  
• The company expects start-up losses of around €50 million for the Aurubis Richmond site in the current fiscal year, impacting earnings in the short term until it becomes fully operational.
  
• The concentrate market is expected to be tighter due to increased demand from the smelting industry outpacing supply from mining, which could exert pressure on treatment and refining charges, potentially impacting gross margins.
  
• A strategic focus on significant CapEx spending, with a projected high-level investment of €820 million this year, may lead to negative free cash flow in the short term, affecting earnings and ROCE before future growth materializes.
  
• Rising personnel costs due to wage increases and the ramp-up of new facilities, such as Richmond, might pressure operating expenses and compress net margins in the near future.

Aurubis Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Aurubis's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 3.5% today to 1.2% in 3 years time.
• Analysts expect earnings to reach €255.5 million (and earnings per share of €7.94) by about May 2028, down from €614.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.2x on those 2028 earnings, up from 5.4x today. This future PE is lower than the current PE for the GB Metals and Mining industry at 18.2x.
• Analysts expect the number of shares outstanding to decline by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.88%, as per the Simply Wall St company report.

Aurubis Future Earnings Per Share Growth

Risks

• Aurubis reported a robust operating result, with an operating EBT increase of 17.5% and net cash flow of €178 million, reflecting the strength of its business model and potentially leading to stable or improving earnings.
  
• The company has a diversified supplier base with long-term contracts, ensuring a stable supply of metal concentrates, which helps secure revenue streams and safeguard gross margins.
  
• There has been an improvement in revenues from increased metal prices and sulfuric acid sales, contributing positively to net profit margins and supporting future earnings growth.
  
• The company's strategic growth investments and efficient capital management have increased the return on capital employed, indicating potential financial stability and enhanced profitability in the future.
  
• Aurubis’ hedging strategy on U.S. dollar exposure and favorable metal pricing suggest effective risk management, likely contributing to the stability of financial results and earnings.

Valuation

• The analysts have a consensus price target of €76.0 for Aurubis based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €90.0, and the most bearish reporting a price target of just €59.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €20.7 billion, earnings will come to €255.5 million, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 5.9%.
• Given the current share price of €76.55, the analyst price target of €76.0 is 0.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.