Australia’s Adelaide Brighton Cement has resolved some of the uncertainty surrounding its major sales contracts in lime and cement. Firstly the deal to supply lime to a local alumina producer covers supply for at least the next five years and is now effective from July 1 next year.
"This is a positive outcome for Adelaide Brighton and we are confident that with our competitive pricing the company will supply the overwhelming majority of the lime requirements of this major alumina customer during the contract period," chief executive Mark Chellew said.
While analysts say the contract is not for 100 per cent of the required volume, the deal provides greater certainty about lime contracts and prices. The company’s next lime contract is due for renewal in 2014.
"Following the heads of agreement for this contract, we believe Adelaide Brighton’s lime EBIT (earnings before interest and tax) is relatively certain over the next three years," Deutsche Bank analyst Emily Behncke said. Deutsche has increased its 2011 net profit forecast by one per cent as a result of the deal and upgraded Adelaide Brighton to a "buy" with 20 per cent upside to the current share price. The broker’s new price target is $3.80.
As an integrated construction materials and lime producer, Adelaide Brighton is heavily exposed to the resources, engineering and infrastructure sectors of South Australia and Western Australia.
In November the group warned it could lose half its 400,000-tonne contract with Cement Australia in Western Australia, a situation which would hit 2011 earnings before interest and tax by about $10 million. But it maintained its forecast net profit after tax for 2010 of about $150m.