Vale presented quarterly net earnings of $3.8bln, a 45% drop to last years 1st quarter. Revenues were down by approx. $2bln driven by both price and volume decreases. Slightly increased overall costs combined with lower volumes show an significant increase of unit costs.
An iron ore price of around $120/t is the current market floor, according to Vale. Many low grade mining operations in China operate at costs around this price, making them go out of business and supply to drop significantly if prices would go below this point.
Gemcom, one of the premier makers of mine planning software, is bought by Dassault Systems from a group of private equity parties. Dassault pays $360mln, while the private equity parties paid $180mln 4 years ago.
Dassault has recently set up GEOVIA; a brand ‘to model and simulate our planet’. It is considering adding more packages to the brand.
Planetary Resources unveils plans to mine asteroids
Planetary resources, a startup company backed by an impressive list of investors including Larry Page, unveiled its plans to start exploration of asteroids with the objective of mining platinum, iron, nickel, water, and rare platinum group metals.
An exploration station should be active by 2020. Timeline to bring metals back to earth was not given. Estimates of total investment to start producing start at $2.6bln, similar to the development cost of a large mining project.
The innovative plans by Planetary Resources underline a growing drive to find alternative methods to obtain raw materials or to find substitutes for the raw materials we often take for granted. If bringing resources from space to the earth would succeed, this could fundamentally change the supply/demand dynamics of our conservative industry. And why would this not succeed? Especially for those materials where global demand is relatively small (e.g. platinum), this initiative should not be deemed impossible. However, futuristic it certainly is.
Dassault’s move to set up a software branch specialized in the natural resources area is riding the trend of increasing importance of standardization and implementation of software tools to manage the portfolio of remote and often interlinked operations of mining companies. Software can help to produce production per employee, an important driver with the current shortage of qualified miners. At the same time the proper integration of operations and managing large parts of the design and operational work for operations from remote locations drives a need for software innovation.
April is traditionally the month in which the major diversified miners present their annual results. BHP Billiton closes its fiscal year in the mid of the calender year, but joins its main competitors in giving an update of its performance in an investor meeting in this month. One of the key objectives of the executives presenting their numbers to an audience that will listen to each of the presentations in the course of a couple of weeks is to make the company look good, or at least better than competitors.
Managing the expectations of investors serves a twofold purpose: in the first place the goal is to make sure the investors know what they are investing in and what the perspectives for the company are – as a result the stock price should reflect the true performance and potential of the company; in the second place the goal is to keep the shareprice high or make it go higher – often referred to ironically as ‘reflecting the true value of the company’.
Why care about stock prices?
Market value matters in the first place from a financial point of view. The higher the market price, the easier and cheaper it is to raise debt, giving flexibility to invest.
The second important reason to care about the share price is the mergers and acquisitions arena. An undervalued company is an acquisition target, and having a strong share price makes doing paper acquisitions (pay with shares instead of cash) attractive.
Why not care about stock prices?
Market value does not matter because an executive should not be driven by short term stock price fluctuations, which are typically mainly the result of market conditions and events the executives do not have a hand or a say in. In the long term good management will lead to a distinct outperformance of competitors, but short term movements are too erratic to say much about management performance.
An executive should not be driven by the market price (i.e. the shareholders interest) alone, but should take the interests of other stakeholders (employees, society), which are often not directly or fully included in the share price, in account too.
Vale announced its plans to appeal to the governments intent to charge $5.6bln worth of taxes on foreign earnings. The clash with the government promises to be the first real test for the new CEO Murilo Ferreira.
Mr. Ferreira took over the leadership of the company from Roger Agnelli, who was not reelected partly based on a disagreement with the government (which is control Vale via state-controlled shareholders) over $2bln taxation.
Rio Tinto increased its ownership of Ivanhoe from 49% to 51%, giving it full control over the flagship Oyu Tolgoi copper project in Mongolia, the world’s premier copper development project.
Vale estimates the impact of a review of the tax code on the company’s earnings to be approx. 4-5% of earnings. Taxation regimes around the world for specifically iron ore and copper mining are reviewed to make the countries benefit more from ‘extreme’ profits, which could be seen as a temporary phenomenon. However, the key issue in Vale is facing now is a debate about double taxation; paying taxes over profits after taxes realized in countries where the company is operating.
Rio Tinto’s control over Ivanhoe will help the company to put in place its management structure and have the project managed by some of its top project developers. Gaining full control of the project in this stage will help Rio Tinto to build the project according to the company’s standards, preventing costly and above all time-consuming future transitions in the operating structure. The global standards that enable effective project management more and more set the world’s largest miners apart from the ‘small’ mining firms with only a few operating assets. Very much like GE has become known as a great ‘project management company’, the world’s largest miners are more and more developing into ‘mine development’ companies in which development speed is the key success factor and navigating politics in developing countries is a key skill.
BHP Billiton and Rio Tinto deliver record production in Pilbara
This was another record-breaking year in the Pilbara with both quarterly and full year iron ore production. Record global iron ore shipments of 239 million tonnes in 2011 were below production due to extreme weather conditions experienced in the first half of the year. Despite this, Rio Tinto’s Pilbara ports operated at above annualised capacity rates and shipped record volumes of 61 million tonnes in the fourth quarter and 225 million tonnes for the full year.
While scheduled maintenance, tie-in activities and the wet season in the Pilbara are expected to affect Western Australia Iron Ore production in the second half of the 2012 financial year, full year production is now forecast to marginally exceed prior guidance of 159 million tonnes per annum.
Vale proposed a minimum dividend of $6bln for the year, an increase of over 50% versus the previous year’s minimum payment and in line with the actual dividend payment over 2011.
Rio Tinto and BHP Billiton continue to build capacity in the Pibara iron ore district. With relatively low mining costs and close proximity to the Asian/Chinese market this iron ore region is the most competitive (and largest) producer in the world. As the output in Pilbara is exceeding expectations and Chinese growth is slowing, exporters in other regions face an uncertain future. The global iron ore market is slowly evolving to a scenario where Brazil and Western Africa supply ore for the European market and the Latin American growth market, and Australia supplies iron ore for Asia.
Vale’s increase of dividends fits in the trend of recent dividend increases in the industry and is a clear sign of uncertainty in the boardrooms of many companies: organic investment opportunities and development capacity are limited, share buybacks and cash takeovers would increase leverage and vulnerability, and with the uncertainty about future economic developments many companies decide to give the cash to shareholders in an attempt to keep share price high.
Australia’s Mineral Resource Rent Tax approved by lower house
The new 30% tax on profits above A$75mln for coal and iron ore projects has been approved by the lower house and is now only to be approved by the senate. The tax has been debated for approx. 2 years. Initially proposed by Kevin Rudd, the former premier, the regime has been tuned down and now includes arrangements to stimulate and protect investments.
Tito Martins, Vale’s head of base metals, has been appointed as the new CFO of the company. Several executive management positions changed in the first major move of the new CEO to strengthen control. Mr. Martins was involved in the acquisition of Inco, which turned into Vale’s base metals division which was led by Mr. Ferreira.
The change of top management of Vale was started by appointing Murilo Ferreira CEO in the place of Roger Agnelli after the presidential elections in Brazil. One of the reasons of conflict between government and Vale was the building of a fleet of iron ore carriers in Asia rather than domestically. This fleet was in the news this week as Chinese ports are refusing to host them, trying to protect the interest of incumbent shipping lines.
Rio Tinto convinced the board of Hathor Exploration, a Canadian uranium explorer, with a C$654mln bid. The bid is approx. 5% higher than rival Cameco’s bid. Hathor owns rights to various uranium deposits in the Athabasca basin.
The changes at Vale should prepare the company for further changes to the business environment for the major iron ore producers. The introduction of the MRRT mainly hits Rio Tinto and BHP Billiton, but all three majors are figuring out how to react to increasing uncertainty about demand. Asian steel producers are pushing for adaptations to the recently changed pricing mechanisms, moving the pricing system to shorter term contracts. At the same time various Asian players are starting to buy iron ore assets in the price range of hundreds of millions to several billions of dollars; threatening the dominance of incumbents.
Rio Tinto is trying to buy into uranium at a moment where industry shares are depressed because of the nuclear disaster in Japan last year. The bid for Hathor signals Rio’s management still believes in the potential of the industry. The company says it accounts for 16% of the world’s uranium production from mines in Australia and Namibia.
Peabody and ArcelorMittal get MacArthur; then ArcelorMittal gets out
Only 2 days after PEAMcoal, the vehicle set up by Peabody energy and ArcelorMittal to buy Macarthur, announced it obtained a majority interest, Arcelor decided to get out of the combination. The company will sell the 16% of Macarthur it had to Peabody. Peabody had teamed up with ArcelorMittal because an earlier bid had not gained the support of the major shareholders.
Vale posted disappointing results for the 3rd quarter: the weak Brazilian real compared to the US dollar hit the company hard, iron ore spot prices dropped 27% q-on-q, and production volumes were lower than planned.
The move of ArcelorMittal out of the Macarthur acquisition is a surprising sign of hesitance and uncertainty about the development of the global steel market. The company prefers cashing $700mln over having to pay an additional $1.2bln to get 40% of the Australian coal miner. It still plans to build an iron and coal mining business to increase self-sufficiency. US steelmakers are also struggling and iron ores prices have plummeted in expectation of falling steel demand.
Exchange rates remain a very important factor in the competitiveness of miners because sales for miners around the world are typically in US dollars, irrespective of the currency in which costs are incurred. As shown in the exchange rate graphs below the Brazilian real has been hit harder than the Australian dollar, key currency for iron ore production of Rio Tinto and BHP Billiton, in the past quarter.
“Brazilian mining company Vale SA said Thursday it struck a two-year collective labor accord with all of the country’s mining workers’ unions. The accord will give Vale employees an 8.6% pay rise effective November and a further 8% pay increase in November 2012, Vale said in a statement. In addition, the employees will get a bonus each year of 1,400 Brazilian reais ($744.68), the company said.
Also, employees who stay in their posts during the next two years will gain a special one-off bonus equivalent to 1.7 times their monthly salary under the agreement. This is designed to keep employees from leaving Vale to join rival iron-ore producers in Brazil, which is suffering from a shortage of skilled manpower in the mining and metals industry.”
Out of 71 thousand of Vale’s employees (Dec 31 2010) approx. 60 thousand work in Brazil.
The agreement holds the middle between Vale’s initial 7.5%/y offer and the union’s ’15%/y plus bonuses’ demands. In previous years Vale gave a 7% increase annually. Inflation rate in Brazil has been around 5-6% over the past years.
Implications:
Creative bonus systems will become a more important part of the mining remuneration policies because skilled resources and talent are becoming increasingly scarce in the mining industry.
Brazil’s National Mining Plan foresees growth of the domestic iron ore production of 58% from 2011 to 2015. Current high ore prices will help to finance aggressive expansion, but the legislative processes around development and the shortage of workers form two important obstacles to realize this objective.
“Cynthia Carroll, chief executive of Anglo American, has downplayed speculation that the multinational miner is on the hunt for acquisitions, saying that bid prices in the mining sector have been ‘too high’ for the company to enter the fray.
‘We are always looking at possible combinations across the sector and always evaluating whether it’s a better business case to build our own projects or look at acquisition opportunities,’ said Cynthia Carroll. But she added that ‘prices are still too high’, basing her comments on recent bids and takeovers.
In recent months, Anglo has been linked to a bid for Riversdale Mining, an Mozambique-focused coal miner that was ultimately bought by Rio Tinto for A$4bn. More recently, it considered a possible bid for Macarthur Coal, an Australian coal miner. Macarthur has since accepted a joint A$4.9bn ($5.2bn) bid from a consortium led by Peabody of the US. The bid values the Macarthur at 18 times estimated 2012 earnings.”
Anglo American has not made any large acquisitions since 2008, when it bought several iron ore assets in Brazil. Of the 5 large diversified miners the company has been least active in large scale M&A over the past 10 years, as depicted below (click on image for larger version).
Implications:
If the acquisitions would be paid in shares, the current low share prices would hinder acquisitions (large dilution of ownership). However, with the current large operating profits acquisitions are mainly paid in cash.
Valuation of companies is done in various ways, based on standalone company value and additional financial and operational synergies of a change of control, all leading to different results: a ‘true value’ of a company can never be determined, as the value differs per acquirer and valuation assumptions are debatable. However, the fact that various companies are acquiring targets in Southern Africa which would have a better operational match with Anglo American (= higher synergies) implies that Anglo is more conservative in its valuation, being cautious to overpay.
“Brazil’s Vale has dropped its $1.1bn offer for Metorex, a central African copper and cobalt miner, clearing the way for China’s Jinchuan Group to complete a $1.4bn takeover that would establish the state-owned miner in risky frontier markets for metals.
The move came a week after Jinchuan, one of China’s largest mining companies, disrupted its Brazilian rival’s plans by offering R8.90 per share for Metorex. Metorex, however, has not yet recommended Jinchuan’s higher offer to shareholders. Its board will “convene shortly to consider its position with respect to the Vale offer and the Jinchuan offer”, the South Africa-based miner said.
‘Africa is a key focus for our company,’ a Jinchuan executive told the Financial Times. He said it aimed to expand production of copper and cobalt, two industrial metals with rising demand being driven by Chinese consumption.”
Metorex is a South African copper and cobalt miner with operations in Zambia and Congo. The company’s board has recommended the shareholders to accept Jinchuan’s offer, paving the way for the takeover of the company. Vale withdrew its inferior bid quoting capital allocation rigor as the reason for not doing a higher bid.
Jinchuan is a government owned non-ferrous metals miner. The company has been rumoured to plan an IPO for many years. End of 2010 the company announced a small acquisition in South African platinum mining and furthermore the company bought a Canadian developer of a mine in Tibet.
Implications:
The acquisition by Jinchuan is an example of Chinese company’s high willingness to pay for foreign assets. The project is certainly not worth more to Jinchuan than to Vale, which owns assets nearby which could cause synergies. However, Chinese companies are willing to pay a high premium to grow internationally, positioning themselves as state champion in a consolidating industry.
“The price of iron ore will remain above $150 a tonne for at least the next five years, according to Vale, the top miner of the commodity. The bullish prediction by Guilherme Cavalcanti, finance director of the mining group, is the latest contribution to a debate on the outlook for the iron ore market that has polarised analysts and investors.
Used to make steel, iron ore is the largest contributor to the profitability for the three largest mining groups: BHP Billiton, Vale, and Rio Tinto. And if Vale’s forecast is correct, the three companies’ shares would be expected to rise sharply.
Asked how long he expected prices to remain above $150 a tonne, Mr Cavalcanti said ‘at least the next five years’, arguing that miners would struggle to meet booming Asian demand. His prediction, in a video interview with the Financial Times, runs against consensus thinking.”
Vale’s finance director explains he is not concerned about high inflation in China as mainly the consumer goods price inflation is high, while construction activity still ensures full offtake of Vale’s production.
Commodity swaps indicate the market expects prices to decline steadily over the coming years.
Implications:
While Vale expects Asian demand for iron ore to stay strong, the companies mainly sees restrained production because of delayed development projects (often because of environmental permitting issues) and weather influences as the key driver for high prices. Together with the high inflation in equipment costs and the relatively weak dollar iron ore prices will for a prolonged time be very elastic to supply.
Vale’s share price is lagging behind the price of its main competitors over the past years, resulting in higher cost of debt and reduced ability to perform share based M&A. With Vale’s large exposure to the iron ore price the company would benefit strongly from higher iron ore price expectations in the market.
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