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Posts Tagged ‘cost pressure’

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

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Anglo American lifted by commodities boom

July 29, 2011 Comments off

“Anglo American has taken advantage of booming commodities prices to boost its interim pre-tax profits by more than two-thirds. A flight to safety among nervous investors has driven up prices for precious metals and diamonds, buoying first-half revenues by more than a fifth at the FTSE 100 miner and prompting Anglo to increase its dividend by 12 per cent.

Strong demand in China has also pushed up prices for iron ore and copper, helping Anglo shrug off the weak US dollar and harsh weather conditions in South Africa and Australia, which included the extensive flooding in Queensland earlier this year.

Anglo has an investment pipeline of $66bn to develop its iron ore and copper mines in South America and coal projects in Australia in order to reap the rewards of booming commodity prices.”

Source: Fincial Times, July 29 2011

Observations:

  • Good financial performance was offset by very poor safety performance: the group recorder 10 fatalities in the last 6 months (8 in the platinum business).
  • $450mln of the revenues (11%) are achieved in De Beers’ diamond business. Iron ore & Manganese (26%) and Platinum (23%) account for the largest share of Anglo’s revenues. Iron ore & Manganese (29%) and Copper (28%) bring in the largest part of the earnings, driven by particularly high commodity prices.

Implications:

  • Focus of Anglo American’s presentation was on expanding production (capex of $2.3bln for 2011H1 with pipeline of $66bln) and on cost control. The company’s operating profit compared to the same period last year suffered from $500mln higher cash costs. Input cost pressures were explained in detail in the investor presentation (see below) For each product the management presented initiatives for cost reduction.
  • Iron ore volumes (-12%) and metallurgical coal volumes (-19%) were down compared to the same period in the previous year, caused by weather disruptions that put BHP Billiton and Rio Tinto in the same position. It will be interesting to see the method of reporting the volumes next year if production can go on without interruptions. Higher volumes will then most likely be presented as significant achievements, without any mention of the disruptions of this year.

©2011 | Wilfred Visser | thebusinessofmining.com

PWC: Mine 2011 – The game has changed

June 13, 2011 Comments off

Accountant and consultancy PWC launched its annual review of the mining industry: Mine 2011. The report analyzes the financial performance of the 40 largest listed mining companies and describes the underlying trends in the industry:

“Last year we highlighted the growing optimism in the mining industry and demand fundamentals that were driving the industry back to boom times. The 2010 results have delivered on this expectation, but it is clear that the game has changed.

  • Combined net profits hit $100 billion
  • Operating cash flows up 59%, leaving more than $100 billion cash on hand
  • Emerging market miners outperform traditional players
  • Capital expenditure of $300 billion announced
  • Supply and cost management key challenges

Revenues for the world’s 40 largest miners leapt 32% to a record $435 billion, driven by surging commodity prices and a 5% increase in production output in 2010.The strong top-line result catapulted the miners’ net profits to an impressive $110 billion – a 156% increase over the previous year.”

Source: PWC, June 2011

Key takeaways:

  • PWC argues that the cost base for many commodities has shifted, resulting in a fundamental change in the supply structure that justifies the commodity price increase. This shift of the cost structure is partly caused by downstream players entering the mining market with a focus more on supply security than on cost effectiveness.
  • The report further shows that the capital expenditure in the industry is still very much lagging the increase in profits, further creating a situation of supply shortage: “In 2010 for every dollar earned in revenue only 18 cents were invested, significantly lower than the 40 cents invested per dollar of revenue in 2007 and the 2003-2009 average of 26 cents per dollar. In 2010 Investing cash flows were only 58% of operating cash flows, compared to an average of 94% for 2003-2009.”
  • New players in the global top 40 are: Agnico-Eagle Mines, Coal India, Industrias Penoles, KGHM Polska Miedz, Shandong Gold Mining, and Silver Wheaton.

More consultant’s reports? See the Business of Mining special ‘Free consulting: Mining industry reports’

©2011 | Wilfred Visser | thebusinessofmining.com

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