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Mining Week 33/’12: Coal, copper, iron ore profit drops

August 13, 2012 Comments off

Top Stories of the Week:

  • Harry Winston chooses between BHP’s and Rio’s diamond business
    • Harry Winston, the diamond retailer that holds a 40% stake in Rio Tinto’s Diavik mine in Northern Canada, is in talks with BHP Billiton to buy the Ekati operation, also in the north of Canada. Both Rio Tinto and BHP are trying to get out of the diamond business as they can’t realize the scale in the industry to make it a core business.
    • Titan, part of the Tata group, is rumoured to be interested in an acquisition of Harry Winston and might emerge as a competitor in the consolidation movement in the diamond business with strong financial backing.
    • Sources: Wall Street Journal; Financial Times
  • Xstrata’s profit drops on prices and volumes
    • Xstrata’s operating profit for the first half year dropped by 42%. Approx. half of the drop is attributed to lower commodity prices, the other half mainly to inflation and lower volumes.
    • An important message communicated in Xstrata’s earnings presentation is the potential of the company to continue stand-alone in case the share acquisition by Glencore (supported by Xstrata management) fails. Xstrata’s shareholders get to vote on the deal on September 7th.
    • Sources: Financial Times 1; Financial Times 1; Xstrata presentation
  • Rio Tinto profits down on lower coal and iron ore prices

Trends & Implications:

  • Xstrata is among the few companies that manages to communicate (or achieve) a unit cost reduction in its earnings presentation, probably the largest driver of positive reception of the quarterly numbers by the investment community. By breaking out the ‘uncontrollable’ inflation part the company communicates it has success in cost cutting, even though nominal costs increased year on year.
  • Most large miners are stressing the discipline of their capital investments in the latest presentations they are giving, promising only to invest if a good return can be achieved. The most prominent example of a potential cutback on capital expenditure is BHP’s announcement that it is reviewing the expansion of the outer harbour in Western Australia required to lift iron ore export capacity to the planned level. While trying hard to show the investments are responsible, the companies also try to communicate that ‘the industry fundamentals’ are still solid, mainly using the projected long-term growth of China as explanation. However, Rio Tinto’s updated demand forecast graphs are among the first that show a negative Chinese trend after 2030 (in line with the model presented on this site). Knowing that a large part of current big projects in iron ore and coal are planned to build capacity for more than 20 years these long-term prospects slowly start to make their way into investment decision-making.

©2012 | Wilfred Visser | thebusinessofmining.com

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Mining Industry Scenarios 2011-2014

March 11, 2011 1 comment

How could the mining industry develop in the period 2011 to 2014?

The mining industry is facing uncertain times. In response to the World Economic Forum’s ‘Mining & Metals scenarios to 2030’ I developed two short term scenarios for the mining industry. Both scenarios describe a plausible, consistent, potential development of the industry in the next 3 years:

 

Scenarios:

  • In Red Wave, China’s government manages to sustain demand growth, resulting in high commodity prices. At the same time China invests heavily all around the world, forcing other miners to focus on organic growth.
  • In Countercurrent, revaluation of the renminbi and high interest rates in China lead to lower commodity demand. Prices decrease across the board. Miners struggle to maintain positive margins. New project development becomes of secondary importance.

Full transcript of the video can be downloaded here

©2011 | Wilfred Visser | thebusinessofmining.com

BHP Billiton: Organic growth enabled by high prices

February 16, 2011 Comments off

“An improving economic backdrop and broader supply constraints continued to support the fundamentals for the majority of BHP Billiton’s core commodities. Stronger realised prices in the December 2010 half year increased. Underlying EBIT by US$8,531 million, net of price linked costs. Industry wide operating and capital cost pressures are, however, being experienced across a range of businesses and BHP Billiton is not immune from that trend. The devaluation of the US dollar and inflationary pressures reduced Underlying EBIT by a combined US$1,415 million.

Operating cash flow of US$12,193 million resulted in the Group ending the December 2010 half year in a net cash position. This balance sheet strength affords BHP Billiton substantial flexibility as it embarks on significant investment in organic growth that is expected to exceed US$80 billion over the five years to the end of the 2015 financial year. Major projects, including those in iron ore and metallurgical coal, are at an advanced stage of the approvals process and should result in a substantial increase in sanctioned project capital expenditure.

Notwithstanding the significant commitment towards growth, BHP Billiton has declared a ten per cent increase in its interim dividend to 46 US cents per share and has announced an expanded US$10 billion capital management program. BHP Billiton will continue to consider both on and off-market execution for the US$10 billion program and, subject to market conditions, expects to largely complete the initiative by the end of the 2011 calendar year.”

Source: BHP Billiton press release, February 16 2011

Observations:

  • The impact of commodity prices on the results for this half year vs. the half year ending December 2009 were: Iron ore +$4.4bln; Base metals +$1.4bln; Metallurgical coal +$1.1bln; All other +$1.7bln.
  • Total investment pipeline for the coming 5 years is approx. $80bln (excl. exploration), half of which will be invested in the iron ore and petroleum business. Especially the budget for pre-feasibility studies (over $20bln) underlines BHP’s ambition to spur organic growth.
  • BHP expects to largely complete a $10bln additional capital management program in 2011, aiming to return a large part of the cash pile of over $16bln to shareholders.

Implications:

  • Revenues and profits have shot up due to price increases. However, just as in the case of Rio Tinto, controllable costs have increased. Extreme weather conditions only partly explain this cost increase. Of the major diversified miners publishing their results this month only Xstrata managed to reduce the controllable costs. Key focus for the large miners in the near future will be to carefully select investments and to keep costs in running operations down.
  • The capital program of $80bln over 5 years and the dividend payout of roughly $5bln a year require the company to have a positive cash flow from operations of some $10-11bln in each half year. At the rate of producing cash in the last 6 months ($12bln for the half year) the company is still building up a reserve that would enable it to make additional acquisitions.

©2011 | Wilfred Visser | thebusinessofmining.com

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