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Mining sector feels heat as Peru turns left
“Shares in mining companies operating in Peru fell sharply on Monday after a leftwing former coup leader won a narrow victory in the country’s presidential election. Grupo Mexico, a metals mining company with operations in Peru, fell 8 per cent in New York trading. Hochschild, a silver miner, and Southern Copper Corp, tumbled 5 per cent and 11.3 per cent respectively. Shares in Xstrata, which is building one of Peru’s biggest mines, were off 0.86 per cent, while Volcan Compañía Minera, in which Glencore has a stake, fell 8 per cent. Ollanta Humala’s victory has provoked widespread fears he would lead a wave of nationalisations and higher taxes on foreign companies. Mr Humala has suggested Peru could impose a windfall tax of up to 40 per cent on mining companies, and also raise the 30 per cent rate that miners currently pay. Trading was suspended after Peru’s stock market plunged more than 12 per cent. The precipitous fall dragged down other markets from Chile to Mexico. BHP Billiton, Rio Tinto and Anglo American, none of which have Peruvian operations, escaped the sell-off.” Source: Wall Street Journal, June 7 2011
Observations:
- Current corporate tax rate for miners in Peru is 30% + 3% royalties/duties + 4.1% on dividends, which is below international benchmarks (see PWC Global mining tax comparison for details)
- The most active international mining companies in Peru are Xstrata, Newmont, Freeport-McMoran, and First Quantum. The effect of the election results on the stock price of Newmont is displayed below, showing a sudden 2% loss vs. other gold miners.
Implications:
- The average stock price decrease of around 10% of Peruvian companies reflects the risk of a tax increase. As the market value is the market’s expectations of future profits, the 10% increase corresponds well with a high likelihood of an approximate 10% tax increase (i.e. 10% after-tax profit reduction) plus the additional risk of increased government control.
- Besides the risk of tax increase and increased government control, foreign companies face the risk of rapid employment cost increases as the new government will quickly try to make a mark in supporting wage increases.
©2011 | Wilfred Visser | thebusinessofmining.com
Mining companies fail to use YouTube
YouTube has over 2 billion views per day. It is the world’s second largest search engine. It hosts more video material than has ever been broadcasted on television. Consumer goods companies use YouTube to scan for trends, market their goods and interact with potential customers. Still, mining companies fail to use YouTube.
Why should mining companies use YouTube?
Establishing a presence on YouTube can be a very effective tool in managing public opinion about the company. The YouTube user is not the investor or the business partner, but the average person using the mined goods. Mining companies are traditionally trying to hide from public attention. Most attention is negative attention, focused on environmental destructiveness and corporate greed. However, communicating with the world out there would help to make more people realize the relevance and the challenges of mining and at the same time serve as a way to gather feedback about the perception and public issues around the company. The public opinion has been a powerful weapon in the mining industry this year in both the decisions about mining tax changes in Australia and BHP Billiton’s attempt to acquire PotashCorp. YouTube can be a powerful tool to influence public opinion.
How are mining companies currently doing?
The lack of use of YouTube by the world’s largest mining companies is shocking. Out of a list of ten of the world’s largest mining companies only 3 have established a YouTube channel (Anglo American, Rio Tinto, Vale); 5 appear to have claimed their channel’s name (Teck, Vedanta, Alcoa, Newmont, Freeport McMoRan), but are not yet using it, potentially because he name has been ‘hijacked’ by a proactive YouTube user. This is clearly the case for the remaining 2 companies (BHP Billiton and Xstrata). Their channels are broadcasting video material totally unrelated to the mining industry. Almost all of these firms have video material available on their websites that could easily be used to communicate on YouTube. The companies certainly do have a presence on YouTube: many videos about the companies have been posted by journalists and activists.
The performance of the 3 companies active on YouTube diverges widely. 
Anglo American started the channel in November 2010 and has posted 1 video about HIV Aids. Rio Tinto made a promising start in the summer of 2009 by uploading 10 videos about various topics, but the last visit date of the account owner is 7 months ago. Still, the videos have been viewed almost 400 thousand times in the past year. Vale has opened a comprehensive YouTube channel. The page and most of the videos are in Portuguese, but this makes sense when considering the geographic location of most of Vale’s operations. A point for improvement is the use of the channel to interact. The company has disabled the option to comment on the videos, making the channel a pure broadcasting station.
The importance of interaction
Simply broadcasting videos on YouTube is not the optimal way of using the site. People will react, and the reactions shape the public opinion. Responding quickly to the reactions gives an opportunity to show empathy, present the facts and win critics over. Below an example of reactions on Rio Tinto’s YouTube channel:
“What happens when polluting industries find themselves surrounded by housing development? People get sick, the companies won’t move. This is the situation in Kilburn, South Australia, right now.”
“Rio Tinto may be a ‘leading mining company’, but it is also one with one of the most appalling international reputations. Type ‘bougainville’ + ‘mercenary’ + ‘RTZ’ into google to find out about their connection to atrocities in Papua New Guinea after the natives refused them permission to mine.”
The reaction of Rio Tinto to these comments? Complete silence. Missed opportunities to explain the company’s position to important opinion makers.
A 5-step guide for Mining Companies to start using YouTube
What should mining companies do to use the potential of YouTube?
1. Appoint a Content Manager – Appoint the person that will be running the show. The Content Manager should not just be responsible for selecting and managing the broadcasted content, but should also be responsible for participating in online discussions and answering to comments.
2. Explore the environment – Don’t plunge into uploading videos without finding out what is going on on Youtube and defining the strategy of content type and structure. For example, most likely YouTube users are much more interested in the environmental performance of the company than in the latest profit figures.
3. Establish a presence – Upload videos, add tags, select favourite videos featuring the company from other sources.
4. Monitor environment and reactions – Don’t only read the comments on the uploaded video’s. Do the same the YouTube user will do: search for information about the company; click-through to related videos; gather all user-generated content about the company.
5. Interact – Respond to both positive and negative reactions. Invite critics to explain, explain the situation and the facts. Feed the most important topics found online to the executive and marketing team.
©2010 | Wilfred Visser | thebusinessofmining.com
Is BHP Billiton too big to grow?
The (provisional) refusal of the Canadian government to let BHP Billiton acquire PotashCorp of Saskatchewan is the third regulatory limitation to growth the company faces in a short period. As regulators around the world are afraid the company gains a dominant position in mineral markets, what options does the CEO, Marius Kloppers, have left to grow the company?
Observations:
- In February 2008, shortly after mr. Kloppers took over as CEO, BHP did a hostile takeover bid for its largest rival: Rio Tinto. The offer, worth approx. $165bln, was withdrawn in November 2008 after regulators indicated the deal would not gain anti-trust approval and the access to debt dried up in the capital markets.
- After the failed acquisition, the two companies agreed to try to realize a significant part of the synergies the merger would have created by setting up a Joint Venture to develop the Pilbara iron ore deposit in Western Australia. However, after both Australian and European regulators indicated this would create an iron ore player that would be too dominant, the plans were cancelled last month.
- The $39bln offer for PotashCorp appears to be a move in which BHP Billiton does not build up a dominant position in any market. If BHP manages to break the cartel-based pricing system for potash the deal might actually benefit the world economy. Still the Canadian government seems to be inclined to let the deal stall to protect the domestic industry and tax revenues.
Implications:
- BHP Billiton has approx. $12bln cash on the balance sheet and is earning more cash rapidly due to the high iron ore price. Typically mining companies need approx. 2-3% of asset value in operating cash, leaving BHP with some $10bln excess cash. The low leverage and the high credit rating of the company enable it to raise at least $30bln additional cash by increasing debt. However, it is hard to select acquisition targets that might actually lead to a combination that will be approved by regulators.
- The company will either need to focus on acquiring large players in markets where it does not have a strong presence yet, or focus on acquiring many smaller players or individual assets. As the company is trying to reduce the portfolio complexity, expansion into completely new markets is unlikely. Potential acquisition targets might be Newmont, Goldcorp, Freeport-McMoran or Eldorado in the gold market and Eramet, Inmet Mining and Outokumpo in the base metal market. Expansion into the industrial minerals sector would also be an option.
- The best way for mr. Kloppers to make a name for himself would be to make BHP Billiton the first major western mining company to build up a strong operating presence in China and/or India. Creating a Joint Venture with a local player might be the best option to achieve this.
©2010 | Wilfred Visser | thebusinessofmining.com
