Archive

Posts Tagged ‘costs’

Breaking down BHP Billiton’s iron ore production costs

September 29, 2011 2 comments

BHP Billiton organized a site tour of its Western Australia Iron Ore operations this week, providing valuable information about its production costs:

Source: BHP Billiton Site Tour Presentation, September 27 2011

Observations:

  • BHP positions itself in the cost curve around $39/t CIF. Average iron ore price for the year ended June 2011 was $163/t, resulting in a 76% operating margin.

Implications:

  • Combining the data from the two charts above, BHP’s breakdown of total iron ore costs of $39/t CIF China are as follows:
    • US$9.4/t – Contractors
    • US$7.0/t – Secondary taxes & royalties
    • US$4.3/t – Freight, distribution & demurrage
    • US$3.5/t – Depreciation, depletion & amortization
    • US$3.1/t – Fuel & energy
    • US$2.7/t – Raw materials & consumables
    • US$2.7/t – Labor incl. consultants
    • US$0.4/t – Exploration
    • US$5.9/t – Other

©2011 | Wilfred Visser | thebusinessofmining.com

Advertisements

BHP Billiton’s record profits don’t hide industry concerns

August 26, 2011 Comments off

“Robust demand, industry wide cost pressures and
persistent supply side constraints continued to support the fundamentals for the majority of BHP Billiton’s core commodities. In that context, another strong year of growth in Chinese crude steel production ensured steelmaking material prices were the major contributing factor to the US$17.2 billion price related increase in Underlying EBIT.

However, BHP Billiton has regularly highlighted its belief that costs tend to lag the commodity price cycle as consumable, labour and contractor costs are broadly correlated with the mining industry’s level of activity. In the current environment, tight labour and raw material markets are presenting a challenge for all operators, and BHP Billiton is not immune from that trend. The devaluation of the US dollar and inflation reduced Underlying EBIT by a further US$3.2 billion.”

Source: BHP Billiton news release, August 24 2011

Observations:

  • BHP Billiton, which uses a fiscal year ending June 31st, reported record full year EBIT of $32bln on revenues of $72bln.
  • The 62% year on year increase in EBIT was mainly caused by ‘uncontrollable’ price increases. BHP managed to increase volumes slightly, but this gain was offset by higher costs of over $1.4bln. In a breakdown of the cost increase BHP estimates approx. half of the increase to be structural.

Implications:

  • Analysts point at the weakness of BHP’s buy-back program, in which the company runs the risk of overpaying for its own shares. In general the buyback and dividend program reveals the lack of investment options and the hesitance of management to embark on aggressive expansion in the light of global economic and financial uncertainty. Though industry leaders continue to mention supply shortage as key industry driver, they don’t want to end up at the top of the cost curve.
  • Key developments to watch in the coming months are the continuation of China’s rapid growth; high iron ore, copper & coal prices; and survival of the international financial system. If any of these trends turn around, 2011 might well be the peak of the mining industry’s profits, after which the mantra of ‘cost control’ replaces the current theme of ‘capacity growth’.

©2011 | Wilfred Visser | thebusinessofmining.com

Anglo American: Restructured and competitive again

February 21, 2011 Comments off

“Anglo American performed strongly in 2010, both operationally and financially, and we have continued to deliver on our clear strategic objectives. In addition to benefiting from higher commodity prices, our focused commodity businesses are driving superior operating performances, through major productivity improvements, disciplined cost management and the benefits of our asset optimisation and global supply chain programmes. We completed a number of sales of non-core businesses during 2010 and into 2011 and our divestment programme is now well advanced. Anglo American’s EBITDA of $12.0 billion, operating profit of $9.8 billion and underlying earnings of $5.0 billion, reflects delivery on all fronts.

We have transformed our Platinum business, moving it down the cost curve, with 23% productivity gains and cash operating costs controlled below inflation, and further safety improvements, while exceeding our refined platinum production target of 2.5 million ounces. Our Kumba Iron Ore, Metallurgical Coal and Nickel businesses also delivered productivity gains, while the benefits of the restructuring of De Beers are clear to see, with the business reaping the rewards of the much improved environment for diamonds.”

Source: Anglo American press release, February 18 2011

Observations:

  • Anglo American’s revenue, EBITDA and Earnings per Share outperformed analyst’s average expectations. Contrary to BHP Billiton and Rio Tinto the company managed to keep controllable costs stable while increasing output.
  • Capex for the next 3 years is planned at $16bln, below planned investments for the main competitors. However, the company has a strong exploration portfolio, especially in thermal coal, copper and platinum.

Implications:

  • The company did announce dividends, but is not yet planning to buy back shares. As the company now holds over $6bln in cash it might be aiming for targeted acquisitions in the near future.
  • The high commodity prices of last year have helped all major diversified miners to reduce gearing to low levels (Anglo American now at 16%). The low gearing and the high cash flow from operations will enable the miners to undertake large projects, both in organic growth and M&A.

©2011 | Wilfred Visser | thebusinessofmining.com

Gold and copper prices push Barrick to record

February 18, 2011 1 comment

“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.”

Source: Financial Times, February 17 2011

Observations:

  • 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.

Implications:

  • 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

%d bloggers like this: