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Posts Tagged ‘cost’

Mining Week 09/’12: Focus back to operational challenges

March 4, 2012 1 comment

Top Stories of the Week:

  • Rio Tinto invests over $0.5bln on driverless trains
    • Rio Tinto announced a large investment in its ‘Mine of the Future’ program to make the first of its approx. 150 trains on the Pilbara iron ore network driverless by 2014. The program will cost the company over $500mln, though it remains unclear what part of that amount is ‘research’ and what part is plain ‘hardware’.
    • Sources: Rio Tinto press release; Financial Times; Sydney Morning Herald on union reaction
  • Kazakhmys sees costs rise faster than revenues
    • Kazakhmys, the Kazakh copper miner, posted flat profits as growth was offset by cost increase of over 20%, mainly due to skyrocketing labour costs in the country’s resource market. The company also made bullish statements about growth of the copper demand in China.
    • Sources: Company overview; Financial Times; Reuters

Trends & Implications:

  • Driverless trains are only one step in the larger automation effort for which Rio Tinto is the technology leader. Other areas of research are improving exploration performance and increasing recovery, especially from underground mines. A lot of the automation work focuses on the iron ore operations in Northern Australia. These operations have the scale to enable large savings by automation, and they struggle continuously with finding sufficient skilled employees at acceptable costs.
  • Whether or not Rio Tinto’s role as the ‘technology leader‘ is a smart strategy is debatable: one might argue that begin a ‘smart follower‘, and thus not paying for the disappointments any large-scale research program holds, is more cost-effective. However, Rio Tinto has taken the approach that any research that can pay for itself in the long term is worth doing. Clearly the company will try to protect its findings as much as possible, but other companies will certainly start using its innovations in some way, reducing demand for skilled labor in remote positions and improving recovery potential.

©2012 | Wilfred Visser | thebusinessofmining.com

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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

Mining Week 02/’12: Temporary & Permanent Cost Increases

January 14, 2012 Comments off

Top Stories of the Week:

  • ENRC settles Congo dispute with First Quantum
    • ENRC agreed to pay $1.25bln to First Quantum to settle the dispute over the Kolwezi Tailings project, the Frontier and Lonshi mines and related exploration interests in DRC. First Quantum was stripped of the rights to these projects by the government, after which ENRC came in and agreed to buy the rights from the government in a move widely criticized in the industry.
    • Sources: ENRC press release; Financial Times; First Quantum press release
  • Coal India agrees to salary costs hike of 25%
    • Coal India, by far the largest miner of energy coal in the country, has agree to a 25% permanent increase of wages. In august of last year the unions demanded a 100% increase to offset increased cost of living and reduce the increasing income gap between management and workers. Investment bankers at the time expected the company to agree to a 15-20% increase. The salary hike results in an increase of operating cost for the company by approx. 10%.
    • Sources: Wall Street Journal; Economic Times
  • Weather in Australia and Brazil drives iron ore price up

    • The closure of the export facilities in Port Hedland because of cyclone Heidi and the cancellation of shipments from Brazil because of heavy rains results in supply pressure in the iron ore market. Heavy rains are expected to continue in the Pilbara region, which supplies close to 40% of seaborne iron ore in the world, in the short term.
    • Sources: Financial Times; Supply Chain Review; Wall Street Journal; Vale Press Release

Trends & Implications:

  • Extreme weather conditions have a big influence on bulk material supply chains in the short term, because stockpiling these materials in amounts large enough to last for several weeks is very costly and thus not a normal practice. Especially the steel industry is hit hard with both iron ore and metallurgical coal having to be shipped in from locations that are often hit by storms. Although the impact on spot prices in the short term can be large, the longer term impact on the miners is quite small. Most contracts allow for some flexibility in when exactly the ore is delivered. As long as the mining operations don’t have to stop, the ore will get to the steel manufacturers as some point.
  • The wage increase expected for Coal India is a good example of the very high cost inflation of mining in developing countries. Whereas the cost increase of contracted services and equipment leasing can be seen as (at least partly) a temporary phenomenon caused by high commodity prices, the cost increase because of increased labor and consumable costs in developing countries causes a more permanent shift of the global cost curves.

©2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 01/’12: New year – Same fear

January 7, 2012 Comments off

Top Stories of the Week:

  • Alcoa cuts aluminium production in fear of lower demand
    • Alcoa announced shutdown of 532,000 tonnes of smelting capacity at the top of the cost curve to lower production costs and improve competitiveness. The 12% reduction of capacity mainly hits operations in the USA.
    • Sources: Financial Times; Wall Street Journal; Alcoa news release
  • Potashcorp temporarily closes a third mine because of low demand
    • After recently temporarily closing down Lanigan and Rocanville mines, PotashCorp now decided to temporarily close Allan mine to because of lack of demand for fertilizer. The combined shutdown of the three mines results in approx. 1 million tonnes of potash, or some 10% of the company’s annual production.
    • Sources: Wall Street Journal; PotashCorp Q4 market analysis report; text
  • Unions in Canada and Zambia make their case for wage increases
    • A union representing copper mine workers in Zambia signaled the foreign miners will have to agree to higher salary increases than the average offer of 11% to prevent widespread strikes. At the same time Rio Tinto Alcan and Caterpillar are taking a strong position against unions in Canada by locking out union workers after expiry of the negotiation periods.
    • Sources: Wall Street Journal on Zambia; Wall Street Journal on Canada

Trends & Implications:

    The mining industry for the last 2 years has been and continues to be gripped by 2 paradoxical fears:

  • The fear for slowing demand due to the lack of recovery after the financial crisis – With the financial crisis over 4 years old already the typical macro-economic cycle of 6-9 years has clearly been disrupted. Governments and companies are still operating in ‘crisis fighting’-mode because demand does not pick up like after a regular economic downturn. Large investments are still undertaken because the belief in the long term demand driven by population growth and growth of average GDP/capita is unchanged, but at the same time companies are trying to manage short term lack of demand by scaling down or temporarily closing operations.
  • The fear for strikes and civil unrest resulting from struggling individuals facing mining companies that continue to realize high profits – Despite the financial volatility the commodity prices generally have remained high, making mining companies among the few companies in the world that continue to generate high profits. With people around the world facing the economic crisis and feeling its impact, friction develops between the rich companies and the less well off workers and neighbours.

©2012 | Wilfred Visser | thebusinessofmining.com

Miners, Supply, and Cost Pressures

September 6, 2011 Comments off

“Building new mines is getting costlier, thanks to higher energy and wage bills as well as equipment shortages. Investing in new copper mines is 50% more expensive in real terms than the average since 1985, HSBC estimates. This acts as a brake on new growth projects. Tighter regulation also slows development; Anglo American estimates getting the right permits to set up a new mine in Australia takes three years now, compared with one year back in 2006.

Many analysts and investors, however, are well aware of the industry’s shortcomings already. Commodities consultant Brook Hunt says it discounts planned industry production growth by 25% for brownfield projects, and by 50% for totally new projects. For a key commodity like copper, it also discounts production forecasts by 5% per year to allow for strikes or poor weather.

Even so, it expects more aluminum, nickel, lead and zinc to be mined ion 2012 than will be consumed, with only the markets for lead and zinc falling into deficit thereafter. It expects the copper market to be in balance next year and surplus thereafter and the iron-ore market to approach balance by 2015.”

Source: Wall Street Journal, September 6 2011

Observations:

  • All large miners report increasing costs, but the high commodity prices still help them to retain profit margins. Large projects are typically phased so that development costs can be controlled per phase.
  • In its latest annual results presentation BHP Billiton reported the increase of capital intensity of iron ore production (for BHP mainly in Western Australia). Costs per tonne of capacity currently are around $200, while pre-crisis costs were below $100 per annual tonne.

Implications:

  • The issue of cost pressures will partly solve itself when demand falls and prices decrease: demand for labor and equipment will fall too, enabling cost cutting.
  • The difficulties of capacity increases is more fundamental: new projects have lower grades, are more remote and located in less stable areas politically, leading to both high costs and more effort required to set up a financially stable project.

©2011 | Wilfred Visser | thebusinessofmining.com

Exchange rates weigh on Rio Tinto profits

August 12, 2011 Comments off

“Rio Tinto’s iron-ore-driven profits set company records for the interim period but shares fell for a fourth day as investors’ flight from equities hits resources stocks hardest.

Tom Albanese, chief executive of the mining company, commented on the widening gap between miners’ rising earnings momentum and falling share prices. ‘There is a distorted set of economic drivers associated with the current uncertainties with respect to us and the European debt markets,’ he told the Financial Times. ‘You have an exaggerated diversion of ‘risk on’ to ‘risk off’ trades. It is difficult to come to any conclusions, but this is a backdrop that could persist for some time.’

… sector-wide pressures of rising costs and adverse exchange rates weighed on Rio’s profitability, contributing to earnings that missed consensus expectations. Higher costs for energy, materials and equipment lowered Rio’s underlying earnings by $479m, and exchange rates between the weak US dollar and strong Australian and Canadian dollars – currencies in which it incurs costs – reduced them by a further $810m in the first half.”

Source: Financial Times, August 4 2011

Observations:

  • Total increase of earnings because of price increases ($5bln) was offset by almost $3bln lower earnings because of volumes, costs and exchange rates.
  • Just as Anglo American, the company gives a detailed explanation of the rising costs, providing rare details on the waiting times for various types of equipment (see outlook – page 8). The outlook shows the average delivery time for equipment currently is approx. 6-9 months higher than average.
  • The impact of lost volumes because of weather impact (hurricanes & floods) in the first half of the year, often mentioned as important driver of prices, is only $245mln.

Implications:

  • Rio Tinto does not appear to be concerned with the current importance of iron ore as the driver of earnings. The company regards construction industry growth in China the most important metric for the economic outlook and mentions expansion of production capacity of Western Australian iron ore mines as key development priority. The company joins competitor Vale in this single-minded focus, while BHP Billiton appears to be more committed to diversify, as signalled by its acquisitions in the shale gas industry.
  • The presented $26bln capex package does not yet include projects in advanced feasibility stage such as Simandou (iron ore in Guinea). The relatively conservative dividend and buy-back program does leave room for very aggressive development spending and helps the company to keep a very low gearing. So far all major miners choose to keep the gearing low despite their positive commodities market forecasts.

©2011 | Wilfred Visser | thebusinessofmining.com

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