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Mining Week 8/’13: BHP names new CEO

February 24, 2013 Comments off

Top Stories:

  • Oil man Andrew Mackenzie named BHP Billiton CEO
    • BHP Billiton announced this week that CEO Marius Kloppers will step down in May and will be succeeded by Andrew Mackenzie, the current head of the company’s non-ferrous division, who worked for BP for 22 years and who worked for Rio Tinto prior to joining BHP Billiton.
    • Sources: BHP Billiton press release; ABC interview; Youtube Reutersvideo
  • Iron ore prices at 16-month high
    • Benchmark iron ore prices rose to a 16-month high at approx. $160/t this week. A cyclone is nearing the Australian coast, potentially causing supply disruptions in the coming week.
    • Sources: CNBC; Indian Express

Trends & Implications:

  • BHPB’s appointment of a chief executive with extensive experience in the oil and gas business signals a further shift of focus from mining to natural resource extraction in general. Given the importance of cost control in the coming years, and considering the company’s asset base in oil and gas and the limited understanding of the oil and gas industry by most miners, appointing an insider with good knowledge of the full range of assets is a logical choice.
  • The increase of iron ore prices is expected to be a relatively short-term development driven by weather expectations and the annual cyclical demand of Chinese importers. which peaks in Q4 and Q1. Long-term price expectations are still much below the current level as additional production capacity is being added at a high pace.

2013 | Wilfred Visser | thebusinessofmining.com

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The Year’s Top Priorities for Mining CEOs

December 31, 2012 Comments off

With rapidly increasing production costs, metal and coal prices stable or decreasing, and general global market uncertainty, 2012 was not an easy year to be the CEO of a mining company. The boards of many mining companies have drawn their conclusions and decided 2013 will be the year in which a new leader will make a start. These new executives and the veterans that survived 2012 will face many similar challenges in the new year. The market for project development appears to cool down, but cost pressures and decreasing margins are real and volatility is here to stay for some time.

Below 7 key priorities for mining CEOs in the coming year:

1. Watch your balance sheet

Global debt problems aren’t over yet, and a company’s debt is never stronger than the host country’s sovereign debt. A lot of national, regional, and corporate debt is still overvalued. The European financial system being too young to make tough decisions, the American political system being to antique and entangled in corporate interests to make tough decisions, and a new Chinese government being too dependent on international markets and national stability to make tough decisions are not going to help to solve the debt issue anytime soon. A new chapter of the debt crisis is likely start in 2013, creating a volatile environment in which prudent balance sheet management is key for business stability, preventing you from finding yourself standing at the edge of a solvency cliff, as many coal miners and even iron ore miner Fortescue experienced recently. Don’t get deep into debt, and don’t wait ‘till the last moment to refinance maturing debt, as many global developments could make raising money in debt markets suddenly very hard.

2. Kill bad projects

As a result of rapidly increasing product prices and in the knowledge that global demand for most commodities continues to grow over the next 2 decades, the project pipelines across the industry have been filled to the max. However, for most products only about one third of the projects currently being communicated as ‘planned’ is actually needed to bridge the supply-demand gap in the 2025. That means two out of three projects need to be stopped. And yes, that includes some of your projects. Deciding which of the development projects in the global industry actually are the good projects, and which not so good projects do have a chance to succeed simply because they have a powerful developer, is going to be a key task for this year. Simply doing an IRR calculation based on an imaginary product price doesn’t do the trick; there might be plenty of better projects out there that will make your price forecasts miss the mark completely. It’s time to rev up the intelligence on competitor’s projects: in the end the best projects survive. Making sure you get hold of your fair share of good projects is the objective for the coming years. Those projects that don’t pass the test and that happen to be yours? Kill them, and move on to priority number 3.

3. Expedite good projects

Hopefully your assessment of global project potential confirms your view that some of the projects in your pipeline will make the cut. Now do everything you can to bring those projects forward. Counter-cyclical investment has been a mantra of management gurus forever, but very few executives actually dare to execute on it. Redirect the resources you free up by killing bad projects – finances, human capital, and equipment – to those projects that might succeed. This does not only help you to bring those projects forward, it also sends a clear signal to the market that those projects really are the probable survivors of the battle of the fittest projects. If you decided that none of your projects are good enough to make it? Get to work on priority number 4.

4. Buy cheap future growth

Many of the important mines of the end of this decade and of the coming decades are still in the hands of explorers or juniors that don’t have the funds or appetite to develop the projects, that are always on the outlook for the acquirer, and that have seen their share price become much more discounted than the prices of their potential acquirers. Buying current production is expensive as always and will be tough on your balance sheet, but this year is not a bad moment to buy the exploration-stage projects that will make your company great in the long run. Be aware that for many of these projects the development capital, that scares most company executives at this point, will actually only be needed during the next commodity price cycle. And yes, those projects are challenged geographically, politically, technically, and environmentally, but so were most of the current great mines 10 years before they started producing.

5. Be tough on suppliers and contractors

The slump for mining suppliers and contractors lags the slump for miners by about a year. Last year was the moment of the great awakening in mining companies that the period of rapid growth is over; this year their suppliers and contractors will feel the pain. Don’t forget to squeeze your suppliers out this year! With many projects being shelved or stopped the bargaining position of engineering and construction constructors and equipment manufacturers is deteriorating quickly. Over the past years they have enjoyed a situation in which there were simply not enough skilled people and production capacity to serve all of the industry’s wants straight away, but that period is about to be over. Cost pressures are still there, but the mining companies can solve part of that issue by paying less in new procurement and trying to renegotiate existing contracts.

6. Get talent on board when the job market is down

The suddenly emerging reality of thinning margins has made most mining companies very hesitant in recruiting, and has led several companies to reduce the size of the workforce or implement hiring freezes. The job market in the industry does not look good, so people stay where they are. Just as you should be searching for the right projects especially during tough times, you should be on the hunt for ambitious talent when the job market is bad. Good people always want to make the next step, and any period in which making steps is hard is a headhunter’s bonanza. Not only half of Xstrata’s executives is seriously looking for a new challenge away from Glenstrata, but junior, mid-management, and executives in paralyzed companies around the world are sensitive to a good offer at this time.

7. Prepare for the low/now growth era

Most of the young talent you recruit at this point will witness the age of ‘peak mining’ during their career. Riding the wave of development in emerging countries the mining industry’s output will grow over the next decades. Still, driven by demographics, economics, and increasing recycled metal supply, the demand for most mined metals is likely to start a slow decrease around 2040. Your investors don’t really care about anything that happens after 2020, but the talent you are recruiting and the communities you are operating in do care. Rio Tinto’s ‘Mine of the Future’ program is focused entirely on the technological future of mining. However, preparing your company for a new, low or no growth, normal implies exploring a whole new way of doing business, technology only being a minor part. Wouldn’t it be great to be known as the CEO who prepared the company for ‘Mining of the Future’?

Enough to work on to keep the miner’s job interesting in the new year! Do you happen not to be the CEO of your company? Don’t hesitate to forward this text to him/her to make sure the most important to-do list in the company includes these priorities. Happy new year!

2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 46/’12: Lonmin vs. Xstrata & the CEO-carousel

November 10, 2012 Comments off

Top Stories of the Week:

  • Lonmin raises equity to stay independent
    • Lonmin announced a $800m rights offering, in that way fending of the proposal by Xstrata to increase its stake in the troubled platinum miner to a majority share.
    • The strikes in South Africa, which escalated at Lonmin’s operations, have caused significant lost production and urgent financial issues for Lonmin.
    • Sources: Lonmin press release; Financial Times; Wall Street Journal
  • BHP starts search for new CEO
    • BHP Billiton has started the search for the successor of CEO Marius Kloppers. Apparently the company will not necessarily promote an insider to the top position.
    • With Mick Davis leaving Xstrata if/when the merger with Glencore is approved and Cynthia Carroll leaving AngloAmerican next year, 3 of the top CEOs in the mining industry will change.
    • Sources: Financial Times 1; The Economist; Financial Times 2
  • India limits export of iron ore
    • Iron ore exports from the Indian state of Orissa will be limited strongly by new production quota for mines without processing facilities.
    • The government is trying to attract processing investment to prevent iron ore is only exported without significant benefit for the country. High export duties (raised to 30% early this year) and production quota are used to discourage exports from the world’s 3rd largest iron ore exporter.
    • Sources: Wall Street Journal; Commodity Online; Steel Orbis

Trends & Implications:

  • Orissa’s attempts to curb exports don’t do much to stimulate local investment in processing capacity. India’s government announced a year ago that it would make it more attractive for companies to invest by setting up mining right and process plant permitting packages. With the current uncertainty about both global demand and India’s local demand outlook it is unlikely that large investments in additional processing capacity will be made in Orissa in the near future. As a result the will mainly slow down the local economy.
  • Almost a year ago, after the announcement of Ferreira as new CEO of Vale, this blog conducted a poll among its readers to find out which top company CEO was mostly to be replaced first. The results showed most trust in the future of Kloppers at BHP. A year later 3 out of 4 are on their way out, while most CFOs have been replaced over the past 2 years too. The high level of activity in replacing top executives indicates a change of mindset in the boards of these companies: shifting from a focus on growth and investment to a focus on operational excellence and payout. The new group of top executives will mainly need to show a track record of cost-control and willingness to make tough decisions on closure of mines.

Results of Dec-2011 Poll on thebusinessofmining.com

2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 37/’12: Glencore increases bid to take over Xstrata

September 8, 2012 Comments off

Top Story of the Week: Glencore takes Xstrata bid hostile

  • Hours before Xstrata’s shareholders were to vote on the proposed merger of equals, Glencore announced it would make a higher bid on different terms . If the vote would have gone on the Qatari sovereign wealth fund would most likely have blocked a deal.
  • The new bid offers 3.05 shares of Glencore for each share of Xstrata, 9% up from the previous bid at 2.80x. In response to the bid Xstrata’s share price went up 8.6% on Friday, with Glencore’s share price dropping 2.9%.
  • Key changes to the previous bid are:
    1. The ‘merger of equals’ will likely change to a plain takeover. As a Xstrata’s shareholders can simply tender their shares and Glencore gains control as soon as it gains a majority of shares (up from the current 35%). Under the former proposed deal approx. two-thirds of Xstrata’s shareholders excluding Glencore would have to vote in favor of a deal.
    2. The initially proposed governance structure with Xstrata’s CEO Mick Davis as the new CEO of the combined company is scrapped and Glencore’s CEO Ivan Glasenberg will take the helm of the new company.

    Official reaction by Xstrata’s independent directors

  • The exact details of the new structure are not yet known, as Glencore is yet to submit the new bid. The implications for the position and potential retention packages for Xstrata’s current top managers and the name of the new company will become clear when the new bid is published.
  • Sources: Financial Times 1 2 3; Wall Street Journal 1 2 3; Reuters; BusinessWeek

Trends & Implications:

  • Facing the likely rejection of the merger bid Glencore had little to lose in changing the terms for the offer. The likelihood of a takeover offer being accepted is much higher than the stakes the merger was going to happen on the proposed terms. Xstrata’s shareholders know that their changes of getting an even better deal than what is offered now are very slim and that they face an immediate drop in Xstrata’s share price if Glencore doesn’t gain control.
  • The offer values Xstrata roughly $4bn higher, but as the company holds 35% of Xstrata already it would cost Glencore approx. $2-3bn extra. If the deal was canceled Xstrata’s share price was likely to lose the roughly 10% in value resulting from Glencore’s bid, amounting to a loss of $1-2bn for Glencore.
  • The sudden governance change to try to make Ivan Glasenberg CEO of the new company is hard to understand. The merger setup was criticized earlier because of the strong focus on keeping Xstrata’s executives on board with generous retention bonuses. Either Glencore’s leadership never really believed they will not be able to achieve the same results as Xstrata’s leadership or they will keep most of the retention controls in place in the new offer.

2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 49/’11: Changes at the top

December 4, 2011 Comments off

Top Stories of the Week:

  • Vanselow quits as BHP CFO
    • After 5 years as CFO of the world’s largest miner Alex Vanselow (Brazilian national) announced he will step down and look for a CEO position in the industry. Mr. Vanselow managed to get BHP through the economic downturn in great financial shape (helped by high commodity prices). His recent experience in acquisitions of Chesapeake assets and Petrohawk and the failed acquisitions of Rio Tinto, Potashcorp, and the failed Pilbara JV with Rio Tinto, make him an interesting candidate for any resources company looking to grow by M&A.
    • Sources: BHP Billiton Press Release; Financial Times; Wall Street Journal
  • Codelco and Anglo continue their copper fight
    • In a legal fight over the rights to the Anglo American Sur project Anglo’s lawyers blame Codelco and the Chilean government to act unfairly. Codelco holds an option to buy 49% of the project, but it is unclear whether that is only of Anglo’s stake or of the total project.
    • Sources: Financial Times; Anglo American Press Release; Codelco Press Releases
  • BHP Billiton gets out of diamonds
    • BHP Billiton announced it will review its options around its only diamond project: Ekati diamond mine in arctic Canada. Rio Tinto, which owns the nearby Diavik diamond mine, is the most likely buyer because of the synergistic potential and the lack of funds and abundance of capital spending needs of other large diamond miners.
    • Sources: BHP Billiton Press Release; Financial Times; MiningMx

Trends & Implications:

  • Mr. Vanselow will be an interesting candidate for global companies looking for a change of CEO. As Brazil’s Vale recently changed CEO and Petrobras’ Gabrielli de Azevedo is widely recognized as a strong CEO with work to do he will most likely look to head up a foreign player. The ideal period for a CEO is typically seen as 6-8 years: after that a new point of view and a new alignment with the personality needed for the phase of a company is often helpful. Taking a look at the top positions of the world’s largest miners at this moment, several CEO position changes can be expected over the coming years.

©2011 | Wilfred Visser | thebusinessofmining.com

Top 10 Priorities of Vale’s new CEO Murilo Ferreira

June 22, 2011 Comments off

Murilo Ferreira

The world’s second largest mining company has changed the man at the top. Roger Agnelli, who led the company for almost 10 years, was replaced by Murilo Ferreira last month. Though Agnelli grew the company into a global force in the industry, he did not manage to please the Brazilian government sufficiently. As a result the new president, Dilma Rousseff, pushed for a change. What is on top of the “To Do”-list for the new CEO?

An analysis of Vale’s latest annual and financial reports, the press conference to introduce the new CEO, investor presentations, and the news about the company in the latest months yields a list of 10 issues that are likely to be at the top of Ferreira’s list of priorities.

The list holds strategic, operational, financial and relational activities, each of which are scored in terms of importance and urgency. Priority 1 on the list is to build strong government relationships; priority 10 is to expand the metallurgical coal business in Latin America. Read on for the full list of priorities. For those readers working with Vale: don’t hesitate to forward the list to mr. Ferreira.

1. Build government relationships

Mr. Agnelli grew the company, but he did not manage to please the Brazilian government. The government controls the majority of the voting shares, and hopes to use Vale as a means to stimulate the domestic economy. The key task for mr. Ferreira will be to build strong government relationships without giving in to government requests which would hurt general shareholder value.

2. Develop strategic messages

A first step for each CEO after taking office is to get the key messages to be repeated over and over again to investors and employees. Especially Vale’s communication to the investor world has historically been poor. Selecting the key points to tell to the world the coming year(s) and tuning the communication and communication support is an important task during these first months.

3. Discuss tax & royalty claims

Related to the first point of building government relationships: the government claims a total of $16.0bln tax over the period 1996 to 2008 plus some $4.7bln in royalties (CFEM). Furthermore, Vale’s current effective tax rate is some 10% below official tax rate because of various tax incentives, for which the continuation is not sure. Reaching agreement with the authorities about these claims and the future tax incentives is crucial for the share price to increase.

4. Build global culture, integrate & decentralize

One of the key points mentioned in mr. Ferreira’s first press conference as CEO was the change of the company style towards a more decentralized system in which team work is incentivized more. Next to driving execution mr. Ferreira will need to be the living example of a global cultural change, in which each part of the business feels equally valuable.

5. Manage vertical integration in Brazilian steelmaking

The next (potential) issue with the Brazilian government is Vale’s role in the Brazilian steelmaking industry. The government wants to create a strong vertically integrated player, and therefore needs Vale to cooperate with players like Gerdau and Usiminas. Although it is in Vale’s best interest to stimulate domestic demand for iron ore to offset the disadvantage in transportation costs to supply the Asian market versus Australian mines, the company wants to stay a pure miner. Developing and discussing strategic options for the domestic industry will be an important task for mr. Ferreira to demonstrate his leadership.

6. Solve roadblocks for development execution

Vale plans to invest $17.5bln in new project development this year, but various projects run the risk of delay. Most roadblocks have to do with demands by federal and regional governments (e.g. the temporary suspension of the Rio Colorado project in Argentina), signalling the requirement to more proactively involve governments in planning procedures.

7. Manage operating cost pressures

A key competitive advantage to Vale is the low cost base of its operations in Brazil. The risk of lower iron ore prices forces mr. Ferreira to try to keep costs down at a time of cost inflation. Especially the management of the energy matrix (energy costs account for over 15% of COGS) and of outsourced services, which are sensitive to Brazilian wage inflation, will require management attention.

8. Compete for position in China

A key task for any big mining firm this decade is to fight for pole position in supplying the number one growth market: China. Mr. Agnelli secured various lucrative supply deals, but Vale did not yet sign significant partnerships. Mr. Ferreira has limited experience with the Chinese market and will thus need to spend time on getting to know the key players and developing relationships which are important for both future development and future supply contracts.

9. Transform internationalization organization

Vale still is a very much Brazilian company: out of the 120 thousand workers (incl. 40% contractors) 80% is located in Brazil. However, this Brazilian focus is starting to hinder the company in attracting international investors, customers, and employees. Even press conference in which new CEO was presented was conducted in Portuguese, certainly posing an obstacle to some investors. Appointing CEO with experience of working in North America is step in the right direction, but mr. Ferreira will need to do more to improve the international image of his company.

10. Build metallurgical coal business in Latin America

Partly driven by the need to diversify the company’s revenue base (68% of revenue still comes from iron ore & pellets, with an even higher percentage when looking at profits), partly driven by the need to build the domestic steel industry, Vale needs to gain access to metallurgical coal close to home. The company operates thermal coal mines in Brazil, but metallurgical coals needs to be imported. Exploration in Colombia is promising, but more needs to be done to build the coal business.

Sources: Vale annual report 2010, Vale CEO press conference May 2011, Vale investor presentation February 2011

©2011 | Wilfred Visser | thebusinessofmining.com

De Beers appoints new chief executive

May 17, 2011 Comments off

“De Beers has ended a prolonged leadership search by hiring a French engineering executive with no experience in diamonds, mining or South Africa. The South Africa-based diamond miner appointed Philippe Mellier as chief executive on Monday. Mr Mellier pursued a career at Ford Motor and Volvo before becoming president of Alstom Transport, the train-making division of the French engineering group.

Nicky Oppenheimer, De Beers’ chairman and guardian of his family’s 40 per cent stake in the company, told the Financial Times that experience in the diamond industry was not an important part of the selection process. ‘We have plenty of experts at running mines. We have plenty of experts in marketing diamonds,” he said. “The key thing is that Philippe has run world-class operations and substantial capital projects, and has experience dealing with joint venture partners.'”

Source: Financial Times, May 16 2011

Observations:

  • De Beers is the world’s second largest diamond miner, with operations mainly in Botswana and Canada. It mined 33mln carats last year. Anglo American holds 45% of De Beers shares.
  • In Mellier’s previous job he was president of Alstom’s transport division with €5.8bln annual sales. Joining Alstom in 2003 his key activities in the first years were to divest non-core businesses, while the company had to be bailed out by the French government. In later years he achieved success in winning government contracts for transport systems and buying into a Russian producer.

Implications:

  • The fact that an industry-outsider with experience in partnerships has been recruited indicates the board’s strategic priority for the next 5 years: strengthening ties with the Botswana government and probably setting up other partnerships to expand.
  • A key challenge for Mellier and Anglo’s Cynthia Carroll will be to decide on potential simplification of the ownership structure of De Beers. A potential buyout by Anglo American or flotation of the company to provide funds for expansion have been discussed for years. Whatever decision made, it will have to be aligned with Botswana’s government, which holds 15% of the company but receives a large part of the profits.

©2011 | Wilfred Visser | thebusinessofmining.com

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