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Posts Tagged ‘BHP Billiton’

Mining Week 20/’12: Commodity outlook and potential US coal takeover

May 13, 2012 Comments off

Top Stories of the Week:

  • Glencore and Rio Tinto fuel commodities outlook discussion
    • Glencore’s Ivan Glasenberg joined his collegue at Noble group and Rio Tinto’s CEO Tom Albanese in stressing that there are no clear signs of a slowdown of Chinese commodities demand.
    • Glasenberg stressed that inventory levels for many commodities are relatively low at the moment, contrary to the belief that increasing inventories should cause a drop of commodity prices somewhere in the next year.
    • Sources: Financial Times; FT Video on Noble outlook; The Australian

  • BHP Billiton rumoured to prepare bid for coal miner
  • ArcelorMittal – Macarthur

Trends & Implications:

  • A potential new takeover by BHP Billiton might be a good moment for BHP to announce writedowns on its acquisitions in the natural gas space. The acquisition of Petrohawk from Chesapeake last year is said to require a significant writedow as gas prices don’t seem to recover. Timing the market and combining the ‘exciting’ news of a takeover in the coal industry might partly overshadow the news of the writedown on the gas assets.
  • The decrease of annual growth of the Chinese economy to single digit numbers is expected to impact construction and manufacturing activity in the short term, but the underlying outlook for the longer term continues to be a shortage of supply. Experts struggle to relate the overall economic growth numbers to short-term growth of construction sector, which drives most of the commodities demand.

©2012 | Wilfred Visser | thebusinessofmining.com

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Mining Week 19/’12: Week of the Investors

May 6, 2012 Comments off

Top Stories of the Week:

  • Xstrata’s investors voice GlenStrata concern
    • In the re-election of Xstrata’s directors the vote against re-election of Ivan Glasenberg, the head of Glencore, increased from 3.6% last year to 13.6% this week.
    • When voting on Glencore’s takeover offer for Xstrata a group of approx. 17% of shareholders could block the deal as 75% of shareholders excluding Glencore’s 33% needs to support the deal.
    • Mr. Glasenberg indicated most of the debate on the merger currently is about the share ratio, which Glencore currently offering 2.8 shares per share of Xstrata.
    • Sources: Financial Times 1; Financial Times 2; Xstrata shareholder meeting results; Xstrata notice on Quatar shareholding
  • BHP Billiton and Rio Tinto return cash rather than invest more
    • Both BHP Billiton and Rio Tinto stressed their commitment to dividend and buyback policies this week.
    • Though reiterating the sustained belief in the long-term growth fundamentals of the commodities markets, the focus of the messages in investor presentations is shifting towards limiting and phasing investment, rather than growing as fast as possible.
    • Sources: Financial Times; BHP Billiton Macquarie presentation; Rio Tinto Asian investors presentation

Trends & Implications:

  • Miners currently focus on returning cash to shareholders because of the combination of short-term cost pressures that make margins shrink and longer term uncertainty about the pace of growth of global demand and the direction of metal prices. Citigroup’s forecast of a falling overall capex (see below in FT’s picture) shows uncertainty about how many of the projects in the current pipeline are really going to make it. Investments in star projects are still done, but the projects that could turn out to be marginal or lossgiving are on hold.

  • Mr. Glasenberg’s comments about the share ratio discussion appear to indicate that Glencore’s bid for Xstrata might be sweetened if the deal runs the risk of not being accepted in Xstrata’s shareholder meeting early July.

©2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 17/’12: The sense and nonsense of stock prices

April 22, 2012 Comments off

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.

©2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 15/’12: Coal in Mongolia, no coal in Australia.

April 9, 2012 Comments off

Top Stories of the Week:

  • Chalco bids for Mongolian coal miner
    • Chalco (holding company = Chinalco) made a tentative $930mln offer for 57.4% ownership of SouthGobi Resources, a Canadian listed company, currently owned by Ivanhoe resources.
    • Sources: Financial Times; Wall Street Journal
  • Coal production issues in Australia
    • BMA, the coal JV between Mitsubishi and BHP Billiton in Queensland, declared force majeure after a week long strike in some of its mines. The labor conflict has been going on for almost a year, with workers campaigning for better contract rights for contracted workers and to retain the union’s power in recruiting decisions.
    • Sources: Financial Times
  • Alcoa again cuts production
    • Alcoa, the largest aluminium producer in North America, announced it would cut alumina production by 2% to support prices.
    • At the start of the year Alcoa cut aluminum production, at that time by 12% and mainly in the USA. The 2% alumina cut is said to be aligned with this 12% ‘final product’ cut.
    • Sources: Wall Street Journal; Financial Times; Alcoa press release

Trends & Implications:

  • The potential Chalco – SouthGobi deal appears to be engineered by or via Rio Tinto. Chinalco owns a significant stake of Rio Tinto, which became the majority shareholder of Ivanhoe recently with the key objective of quickly developing the Oyu Tolgoi gold-copper mine (also in Mongolia).
  • Despite a general demand boom which has not passed aluminum many major aluminum producers are posting losses. Profit margins over the past 10 years average below 10%. The key reason for this situation is an overcapacity resulting in oversupply and high inventory levels. Aluminium is currently one of the very few mined natural resources that could be seen as a ‘demand-driven’ market rather than a ‘supply-driven’ market for price setting. However, as more and more producers cut investment, the demand growth fundamentals should invert this situation in the next couple of years.

Alcoa's long term demand outlook as presented end of 2011

©2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 13/’12: Diamonds are not forever, neither are iron ore chiefs

March 31, 2012 Comments off

Top Stories of the Week:

  • Rio Tinto puts its diamond division up for sale
    • Rio Tinto started a ‘strategic review’ of its diamond business to explore divestment options for the 4 assets. The move comes only months after BHP Billiton announced it intends to sell its only diamond project.
    • Rio Tinto was seen as the most likely buyer of BHP’s Ekati project because of the close proximity to it’s Diavik operation.
    • Sources: Rio Tinto press release; Financial Times; Wall Street Journal
  • BHP Billiton iron ore president quits; replaced by insider
    • Ian Ashby, president of BHP Billiton’s iron ore division, announced he will step down in July. BHP will replace him with the head of the energy coal business: Jimmy Wilson.
    • The leadership change comes during an aggressive investment program to expand capacity of the Pilbara operations.
    • Sources: BHP Billiton press released; Wall Street Journal
  • Indian privatization of coal mines backfires
    • A leaked government report states that the Indian government missed out on $210bln by selling state owned coal assets to cheaply without having a proper auctioning mechanism in place.
    • The hedge fund TCI, which owns close to 2% of Coal India, has started a process to sue the management of Coal India for allowing too much government interference related to the sale of assets.
    • Sources: Financial Times; Times of India; Financial Times II

Trends & Implications:

  • In March of last year Rio Tinto was said to explore a partnership with Alrosa, the world’s second largest diamond miner. This cooperation never materialized, and it appears Rio Tinto’s management has decided the iron ore business does not fit in its strategy of running large scale operations of traded minerals. With the presence of DeBeers and Alrosa it is unlikely that a third player will be able to invest to buy both Rio Tinto’s and BHP Billiton’s operations.
  • India is one of the few mineral rich countries in the world that had to go through a large scale privatization program in the last years. Typically domestic investors who know the businesses and have access to influential officials manage to get good deals in buying assets (Russia is another good example). Often the real value of the formerly government owned assets only becomes apparent after a couple of years of operation in private hands.

©2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 12/’12: Australian tax passed, but BHP warns for demand

March 24, 2012 Comments off

Top Stories of the Week:

  • Australian Minerals Resource Rent Tax finally approved
    • The tax on high profits for Australian iron ore and coal projects which led to a change of premier in the country was finally passed by the parliament last week.
    • Officials from the mineral rich states of Western Australia and Queensland argued that the taxation should be a state arrangement rather than a federal law
    • Many critics expect the MRRT not to bring in the amount of cash the governments expect because of tax management by the largest players and potentially because of lower profit margins as a result of increasing costs.
    • Sources: Economist; Wall Street Journal
  • Mixed signals on China’s iron ore demand
    • In the same week BHP warned that China’s demand for iron ore is slowing down and the Australian state of Western Australia increased its outlook for exports.
    • BHP still is bullish about long term demand in China and does not scale down its investment programs. However, in the short term the company ‘’gives caution” demand might drive down iron ore price to $120/t
    • Sources: Wall Street Journal; BHP Billiton presentation; Financial Times

  • Power struggle for Rusal amidst debt issues
    • A new chairman was appointed to the board of Rusal and his predecessor, mr. Vekselberg, made public that the company was struggling with large debt problems and said it had management problems.
    • Rusal announced that it would write down a large part of the value of its Norilsk stake in an attempt to restructure its balance sheet.
    • Sources: Financial Times 1; Financial Times 2; Lex Video

Trends & Implications:

  • Various of the large Russian miners are trying to diversify both in products and geographic presence. Key problems the companies appear to encounter are a clash of management and corporate governance styles between Russia and western investors and large debt burdens in combination with the need to reinvest most or all of free cash flow to modernize or expand.
  • Australia basically kicked off a wave of mining taxation overhauls in countries around the world. Given the very large output of coal and iron ore operations in the country the implementation of the MRRT will be the most impactful for the overall profitability of the industry. As many of the new tax regimes are based on progressive operating margin scales and operating margins of most companies are decreasing because of cost inflation, it is questionable if the new regimes will result in the income countries are hoping for in the short term.

©2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 07/’12: Results time and the Bumi story

February 19, 2012 Comments off

Top Stories of the Week:

  • Friction between Bumi board and Rothschild
    • Conflict arose in the board of Bumi, the Indonesian coal miner with the investor Nathan Rothschild as a large investor after a reverse takeover of the Vallar investment vehicle. After initial conflicts the Indonesian board members planned to remove mr. Rothschild from the board, but he now only appears to have to give up his co-chairmanship. Share price of the company dropped significantly after the news of the conflict.
    • Sources: Financial Times; Wall Street Journal; Bumi’s overview of board members
  • Annual results published without major surprises
    • (Higher prices + higher costs) x lower volumes = lower profits. That was the story of the results releases of the world’s largest miners this week. The impairment taken by Rio Tinto on the Alcan acquisition costs probably was the most significant item, together with the relatively positive outlook given after the negative and uncertain signals given about global demand in the past months.
    • Sources: Rio Tinto results presentation; text; Wall Street Journal on Anglo
  • BHP (58%) and Rio (30%) expand Escondida at $4.5bln cost
    • BHP Billiton and Rio Tinto announced investments of $4.5bln to replace the plant at Escondida, the world’s largest copper mine in output, increasing capacity and enabling mining restricted by the current facilities.
    • Sources: BHP Billiton news release; Rio Tinto media release; Reuters

Trends & Implications:

  • February is the month in which most of the world’s largest diversified miners present their annual results (only BHP Billiton runs a different fiscal year). The investor presentations provide interesting reading and give a good idea of the vision for the future of the industry. Below a peak preview with the most insightful slides from the presentations:

©2012 | Wilfred Visser | thebusinessofmining.com

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