Top Stories of the Week:
- 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.
- Sources: Rio Tinto press release; BHP Billiton press release; Financial Times
- 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.
- Sources: Vale press release; Wall Street Journal; Financial Times
Trends & Implications:
- 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.
©2012 | Wilfred Visser | thebusinessofmining.com
“Surging gold and copper prices propelled Barrick Gold to record earnings of almost $900m in the fourth quarter, but the world’s biggest gold producer warned of escalating cost pressures. The Toronto-based company reported lower operating costs last year but Aaron Regent, chief executive, said that inflationary pressures “have become more pronounced” across a broad front, including raw materials, freight and labour. Mr Regent added that demand for these inputs is accelerating as mining projects around the world are brought forward to take advantage of buoyant commodity markets.
In a partial reversal of its aversion to hedging, Barrick said that it had taken advantage of high spot silver prices and attractive option terms to guarantee prices on 15m ounces of silver, which is equal to 10 per cent of Pascua Lama’s output in the five years from 2013 and 2017. The strategy will ensure prices of $20-$55 an ounce.”
- Barrick took a $4.2bln hit in 2009 to eliminate the hedge book. Net cash inflow in 2010 was $4.8bln, leaving the company with $4bln in cash, of which just over half is planned to be spent on capital expenditure this year.
- Total cash cost for the production of last year was $457/oz., with Q4 almost $30/oz. higher. Costs are down compared to last year (with low production), but up 32% from 2007 levels.
- The return to hedging gives a signal that Barrick expects the silver price not to rise further. In the ’80s and ’90s Barrick used an extensive gold price hedging strategy, in which the full production of the next 3 years was continuously hedged. With the falling gold prices in this period this was a profitable strategy. In 2003 the company decided to stop hedging to gain exposure to increasing gold prices. However, the open hedges for many years were very costly as gold price never returned to 2003 levels.
- The cost increase experience by Barrick is in line with increasing cost figures diversified miners announced this week. Controlling operational costs will return to the priority lists in order to protect margins when commodity prices decrease.
©2011 | Wilfred Visser | thebusinessofmining.com
“Caterpillar Inc. (NYSE: CAT) and Bucyrus International, Inc. (Nasdaq: BUCY) announced today they have entered into an agreement under which Caterpillar will acquire Bucyrus International in a transaction valued at approximately $8.6 billion (including net debt). The acquisition is based on Caterpillar’s key strategic imperative to expand its leadership in the mining equipment industry, and positions Caterpillar to capitalize on the robust long-term outlook for commodities driven by the trend of rapid growth in emerging markets which are improving infrastructure, rapidly developing urban areas and industrializing their economies.”
- Bucyrus has a product portfolio including drills; draglines; shovels; excavators; mining trucks; highwall, longwall and room & pillar miners; and belt systems. This portfolio complements the position of Caterpillar, which is mainly strong in loaders and trucks in the mining industry. Sales are roughly equally divided over surface and underground mining equipment.
- The offer worth $8.6bln is all cash, forcing Caterpillar to increase debt by approx. $5bln and equity by approx. $2bln. However, as Caterpillar is more highly leveraged than Bucyrus, the deal will actually help CAT to reduce leverage.
- The premium of 32% will have to be justified by synergies that are mainly to be found in consolidation of the supply chain, dealer and service network and in the potential for increased revenues as the Caterpillar gains a stronger position to be the sole-source supplier of mines
- The closing of the deal is subject to regulatory approvals, which might force Caterpillar to divest some assets in order to prevent a dominant position in several markets. Especially in the area of mining trucks the new company becomes a dominant player, as Bucyrus bought the mining division of Terex early this year.
The global recession has forced many companies to reevaluate their capital structure. Both the cost of debt and the likelihood of bankruptcy at high debt levels increased, offsetting the benefit or reduced tax expenses at high debt levels. It is therefore no surprise that the largest diversified miners have decreased their gearing. They have benefited from increasing commodity and share prices to reduce debt stake of firm market value to around 33% ((D/E); or 25% in D/(D+E)), in line with the industry’s historical average. A year ago Ernst & Young observed in a report on debt in the mining industry that the gearing had increased to 46%.
The liability breakdown based on market value of equity for the 4 major diversified miners shows the strong position of BHP Billiton (Figure 1). The 86% equity in the financing mix, combined with over $12bln in cash, gives the company an enormous financial flexibility. Anglo American struggles to keep up with the other majors at a total of 66% equity (gearing of approx. 50%).
The Book Value liability comparison does not show significant differences. The relatively large portion of common stock in Vale’s balance sheet mainly indicates that the company issued large amounts of stock more recently than the other companies.
While gearing of the companies varies quite a bit, the asset base is remarkably similar (Figure 2). The assets of the large miners typically show approx. 67% Plant, Property & Equipment (PP&E). The most obvious variation among the companies is the percentage of “other fixed assets”, which hold the goodwill created by paying a premium in acquisitions of other companies. Rio Tinto’s balance sheet still holds $14bln goodwill (33% of total assets), mainly because of the acquisition of Alcan in 2007. The relatively high percentage for Anglo American is not caused by goodwill but by a high proportion of long term investments in other companies.
Another important difference is the percentage of cash carried by the various firms. While the diversified miners typically need approx. 2-3% of asset value as operating cash, BHP Billiton holds 14% ($12bln), signaling a pile of excess cash held as a war chest for potential acquisitions. Rio Tinto’s cash at 4% of asset value is a healthy level, but indicates the company does not have much flexibility for acquisitions and/or capital projects in the short run.
The figures below show the evolution of asset base and capital structure of each of the four miners over the past 4 years.
BHP Billiton has maintained a stable asset base over the past years, using the large profits to slowly build a war chest for acquisitions. After the failure of the bid for Rio Tinto in 2008 and the potential failure of the bid for PotashCorp of Saskatchewan this year the company will have to reconsider announcing a superdividend or repurchasing shares to give cash back to shareholders.
“After providing a flood of capital when the rest of the world was closing its checkbooks during the financial crisis, China’s mostly state-controlled mining sector is likely to find itself increasingly outgunned in the race for Australian resources, according to bankers to the industry.
‘Through the financial crisis, China was the provider of capital of last resort,’ said Alan Young, a managing director at J.P. Morgan in Sydney. ‘What you’re seeing now is that companies have other options.’
The return of commodities prices to historic highs in recent months has changed the equation, making funding from Asian end-users more of an option than a necessity.”
- Various Australian mining firms have raised money on stock markets (Fortescue, MacArthur) now that investors turn back to markets and interest in mining stocks is increasing. This reduces the need for the mining companies to raise cash by partnering with cash-rich Chinese firms.
- The increase of the exchange rate of the Australian dollar versus the American dollar and the Chinese Renmimbi further decreases the attractiveness for Chinese firms to invest in Australian mining property.
- Chinese companies have ongoing interest in expansion abroad. As they will have to compete with other sources of money for western companies they will resort to offering more favorable conditions or to acquiring foreign assets.
- The increasing competitiveness to act as financer of mining projects strengthens the need for the Chinese mining and metals industry to consolidate; creating less but stronger companies that have the power to make international deals.
©2010 | Wilfred Visser | thebusinessofmining.com