Nyrstar announced it is considering to transform its Australian Port Pirie smelter into a metals recovery facility which would allow recycling of ‘a wide range of high value, high margin raw materials, including internal residues from Nyrstar’s existing global network of zinc smelters complex lead concentrates and e-waste’.
Nyrstar commented that the capital cost of such a conversion would be approximately AUD350m and a significant portion of that expenditure would not come before 2014/2015.
The developments at Nyrstar are an example of how additional competition might arise in the future for Umicore’s currently very profitable precious metals recycling business. Although it will take Nyrstar quite some time to develop Port Pirie into a well performing recycling plant, we believe, eventually Umicore might lose some input streams (by-products from Nyrstar’s European zinc smelters in Balen (Belgium), Budel (Netherlands) and Auby(France)). Given the location of Port Pirie (South Australia), we believe it is somewhat less a threat in the hunt for other raw materials like e-scrap and spent catalysts.
Note that our Umicore model incorporates already a gradual decline in profitability margins of the Recycling division, from a recurring EBIT margin of approximately 46% in 2011 to 26% by 2020 (and beyond), on the assumption that additional competition (be it from Nyrstar or from other players) will eventually emerge. Hence we see no reason to change our view our forecasts following Nyrstar’s announcement. Accumulate, € 43 target price maintained.