Investment Column: Vedanta expansion is worth backing

Allergy Therapeutics is one not to be sneezed at; inventive vodkas not enough to lift spirits
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The Independent Online

India and China, the boom economies of the decade, are industrial boiling pots, and miners and smelters have been working at full blast to produce the metals these countries are swallowing up. Metal prices are at record highs, with little sign of cooling. But the toil and grind mining companies are going through in this frenzied period of production was made clear yesterday at Vedanta Resources, the Indian-based metals producer that listed in London in December. It said its production record over the past six months had been patchy, with the amount of copper mined down 13 per cent while it dug down past its exhausted mining face to the next level. One of its copper smelters was also shut down for maintenance, as was its zinc smelter. Added to this were accidents and weather problems - the production of alumina (unfinished aluminium) dropped after a fire in one of its plants and flooding from the monsoon season helped to cause a 17 per cent drop in the production of copper cathodes, the end product of co

India and China, the boom economies of the decade, are industrial boiling pots, and miners and smelters have been working at full blast to produce the metals these countries are swallowing up. Metal prices are at record highs, with little sign of cooling. But the toil and grind mining companies are going through in this frenzied period of production was made clear yesterday at Vedanta Resources, the Indian-based metals producer that listed in London in December. It said its production record over the past six months had been patchy, with the amount of copper mined down 13 per cent while it dug down past its exhausted mining face to the next level. One of its copper smelters was also shut down for maintenance, as was its zinc smelter. Added to this were accidents and weather problems - the production of alumina (unfinished aluminium) dropped after a fire in one of its plants and flooding from the monsoon season helped to cause a 17 per cent drop in the production of copper cathodes, the end product of copper refining.

At the same time, high energy prices, particularly on coal and coke, are hitting production costs. Vedanta is also losing out in the short term from import tariff cuts by the Indian Government. This has damaged Vedanta's competitive position.

But it is spending $2bn over the next three years to expand its production of zinc, aluminium and copper and to move on to a lower cost base. It plans to double its aluminium production by 2007 and to increase zinc production by 65 per cent. By this time, metal prices may be on the wane, so the increased volume will protect earnings.

The expansion projects are all on track, the company says, although it is still awaiting permission from environmental authorities to start production in one new copper smelter. This is taking longer than anticipated and highlights the significant risk in Vedanta - failure to deliver on its expansion plans, which is a possibility, would hit earnings significantly. Further tariff changes and falling commodity markets would also take their effect.

Shares in Vedanta crashed after listing in December and have only recently begun to regain ground. At 381.5p, however, it is trading at about 16 times 2005 expected earnings. In a strong market with a good pipeline of developments, the shares should prove a rich seam.

Allergy Therapeutics is one not to be sneezed at

Allergy Therapeutics, which began trading on the Alternative Investment Market yesterday, hopes to take on the billion-dollar business of common allergies.

Some $12bn (£6.7bn) is spent on mitigating the misery caused by pollen and dust mites every year. But most treatments only suppress the symptoms rather than treat the cause. Allergy Therapeutics has designed an allergy vaccine and believes its potential is enormous. In Japan, for example, 40 million people are estimated to be sensitive to the pollen on its native cedar tree. In the US, some 2.5 million people use vaccine treatments that require 50 to 80 injections a year. The treatments offered by Allergy Therapeutics, for $1,000 a time, only need four jabs.

Unlike many of the biotechs, which only develop the drug and need partners to bring it to market, Allergy is already a fully functional, profitable pharmaceutical company, manufacturing and selling its vaccines to 80,000 people in Europe. It raked in £18m in sales last year. But in order to be fully registered in the US and the UK, and to promote its existing vaccines more widely, it needs to put them through further clinical trials. The £16m it raised through the float will help to pay for these to begin in 2006, and it could be on the US market in 2007/8.

Its shares closed at 74.5p yesterday. Losses are expected in the short term as the trial costs kick in, but core earnings should remain solid and it has long-term growth prospects that are not to be sneezed at.

Inventive vodkas not enough to lift spirits

Inventive Leisure, which owns the Revolution vodka bar chain, has been among the high street operators drowning their trading sorrows by offering cheap drinks to attract punters.

Binge price-cuts have led to binge drinking - but Inventive, however, does seem to have sobered up its business in recent months. Yesterday the group said sales had turned positive, up 1.1 per cent over the first 14 weeks of the new financial year, thanks to new vodka flavours and a new food menu.

There are now 37 Revolution bars in the UK, and the management plans to have 60. But this will take some time. Capital expenditure was reined in last year while trading remained difficult, and there are only two major new openings planned for this year. A reasonably strong balance sheet, however, means it can mop up sites from other distressed operators.

Despite being one of the cheapest in the sector, trading at about eight times earnings, the high street is still a hostile place for Inventive and others, with few growth opportunities and the looming possibility of a smoking ban. Like the Tabasco-flavoured vodka - avoid.

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