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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 Week 13/’12: Diamonds are not forever, neither are iron ore chiefs

March 31, 2012 Comments off

Top Stories of the Week:

  • Rio Tinto puts its diamond division up for sale
    • Rio Tinto started a ‘strategic review’ of its diamond business to explore divestment options for the 4 assets. The move comes only months after BHP Billiton announced it intends to sell its only diamond project.
    • Rio Tinto was seen as the most likely buyer of BHP’s Ekati project because of the close proximity to it’s Diavik operation.
    • Sources: Rio Tinto press release; Financial Times; Wall Street Journal
  • BHP Billiton iron ore president quits; replaced by insider
    • Ian Ashby, president of BHP Billiton’s iron ore division, announced he will step down in July. BHP will replace him with the head of the energy coal business: Jimmy Wilson.
    • The leadership change comes during an aggressive investment program to expand capacity of the Pilbara operations.
    • Sources: BHP Billiton press released; Wall Street Journal
  • Indian privatization of coal mines backfires
    • A leaked government report states that the Indian government missed out on $210bln by selling state owned coal assets to cheaply without having a proper auctioning mechanism in place.
    • The hedge fund TCI, which owns close to 2% of Coal India, has started a process to sue the management of Coal India for allowing too much government interference related to the sale of assets.
    • Sources: Financial Times; Times of India; Financial Times II

Trends & Implications:

  • In March of last year Rio Tinto was said to explore a partnership with Alrosa, the world’s second largest diamond miner. This cooperation never materialized, and it appears Rio Tinto’s management has decided the iron ore business does not fit in its strategy of running large scale operations of traded minerals. With the presence of DeBeers and Alrosa it is unlikely that a third player will be able to invest to buy both Rio Tinto’s and BHP Billiton’s operations.
  • India is one of the few mineral rich countries in the world that had to go through a large scale privatization program in the last years. Typically domestic investors who know the businesses and have access to influential officials manage to get good deals in buying assets (Russia is another good example). Often the real value of the formerly government owned assets only becomes apparent after a couple of years of operation in private hands.

©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

Rio Tinto plans Russian diamond push

March 22, 2011 Comments off

“Rio Tinto is planning a push into Russian diamond mining, eyeing a tie-up with Alrosa, the state-owned miner, as the global industry looks ahead to rising demand from China amid tight supply constraints. Rio is understood to be a final contender to form a partnership with Alrosa to develop a large deposit near the northern port of Archangel, according to diamond market insiders.

The company declined to comment on its intentions or on wider reports that Tom Albanese, chief executive, had travelled repeatedly over the past year to Russia, a country where Rio has no operations. Rio makes the bulk of its profits from iron ore but it is also a significant diamond miner, producing 13.8m carats last year, compared with De Beers’ 33m and Alrosa’s 34.3m. Alrosa exceeded De Beers’ production for a second year.”

Source: Financial Times, March 20 2011

Observations:

  • Rio Tinto mined 13.8m carats last year in its Diavik and Argyle mines, the lowest volume in over 5 years. Relative importance of diamonds in Rio Tinto’s portfolio has decreased from over 20% of EBITDA 10 years ago to only some 2% now.
  • Argyle and Diavik have approximately similar proved reserves, but probable reserves for Argyle are much higher than for Diavik. Additionally the company has some low grade probable reserves in Murowa (Zimbabwe) and an ongoing feasibility study in India (Bunder). Total recoverable reserves at end of 2010 stands at 206mln carats. In the last annual report the company listed the search for opportunities for inorganic growth in Diamonds and Minerals as key priority.

Implications:

  • Alrosa is facing high levels of investment to increase production in challenging arctic underground mining conditions. Because of low cash flow from operations it has to look to financial markets (IPO) and partnerships to secure funds for capital expenditure.
  • Teaming up with Rio Tinto gives Alrosa not only access to development capital, but also to the extensive knowledge Rio Tinto has gained by operating Diavik’s mine in Northern Canada. However, Rio Tinto will not step into a partnership with a state-controlled Russian company without getting strong commitments to secure its returns.

©2011 | Wilfred Visser | thebusinessofmining.com

Rio Tinto to expand diamond operations

September 16, 2010 1 comment

“A bullish outlook for precious stones has prompted Rio Tinto, the London-listed miner, to spend $800m (£518m) expanding its diamond operations. The mining group is primarily focused on iron ore, copper and coal, but has a diamond business that is sometimes overlooked in spite of being the third-largest in the world behind industry leaders De Beers and Alrosa. Rio’s division is based on two mines, including Argyle in the Australian desert.

Rio said on Tuesday that it would spend $803m to construct an underground mine at Argyle, a plan it authorised in 2005 then froze when the financial crisis hit. The expansion will push Argyle’s productivity from 10.6m carats last year to about 20m annual carats in the years leading up to the mine’s closure in 2019, said Harry Kenyon-Slaney, chief of Rio’s diamond and minerals arm.”

Source: Wall Street Journal, June 8 2010

Observations:

  • Rio decided in 2005 to start development on the transition from open pit to underground mining at the Argyle diamond mine in Western Australia. Low global demand and uncertainty about capital conditions forced the company to freeze this decision for several years.
  • The company is mainly active in the production of industrial diamonds, although part of Argyle’s production (the pink diamonds) are used in jewellery. Expansion of Diavik diamond mine is one of Rio’s key capital projects at the moment.

Implications:

  • Global demand for both industrial diamonds and stones for jewellery mainly depends on the Chinese economy. De Beers, among others, is actively trying to improve the image of diamonds in the Asian market. Industrial diamonds, used for cutting and sawing, clearly depend on the growth of construction and industrial sectors.
  • Development of an underground mine at Argyle can be performed rapidly, as an exploration drift can be expanded in order to develop the underground infrastructure. Underground production could therefore start within 2 years.

©2010 | Wilfred Visser | thebusinessofmining.com

Top 10 Priorities of Rio Tinto’s CEO Tom Albanese

June 28, 2010 1 comment

In the series of specials on the priorities of the CEOs of the world’s leading mining companies we analyze Rio Tinto this time. What is top of mind for Rio’s CEO Tom Albanese?

Tom Albanese

An analysis of Rio Tinto’s latest annual report; financial reports, investor presentations and the news about the company in the last months yields a list of 10 issues that are likely to be at the top of Albanese’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 the lobby on the new Australian mining tax. Number 2 is restoring the operating margin of the company. The list closes with resetting the focus of the exploration program. Read on for the full list of priorities.

 

Priority 1 – Lobby against Australian mining tax

Although prime minister Kevin Rudd has been replaced by Julia Gillard, the negotiations about the reformation of the Australian mining tax system stay the top priority for mr. Albanese. If the super profits levy proposed by mr. Rudd would be implemented without changes (which is very unlikely at this point), Rio’s profits would take a hit of approx. 20%. As part of the tax discussions Rio Tinto is re-assessing its portfolio of development projects in Australia, as the feasibility of many projects is endangered by the tax.

Priority 2 – Restore operating margin

The operating margin of the company has decreased most of the large diversified miners, down at less than 20%. Especially in the diamonds and minerals unit major cost cutting needs to take place. Furthermore, the transformation of the aluminium business is to continue to take out more costs.

 

Explore the revenue, profit & margin data at Wikinvest

Priority 3 – Achieve ‘A’ credit status

The balance sheet has been strengthened significantly in 2009, but achieving the ‘A’ credit status remains top priority for the CFO in order to ensure access to capital in the near future. “Prudent balance sheet management” and a “complete review of trading security practices” are mentioned as key issues for 2010.

Priority 4 – Sell Alcan packaging food

Rio undertook a major divestment program of non-core assets to strengthen the balance sheet. It did succeed in collecting $8bln already, but still wants to bring more cash in by selling the remainder of the packaging food division of Alcan for some $2bln.

Priority 5 – Complete Pilbara Iron ore JV

The enormous Western Australian iron ore operations, for which a Joint Venture with rival BHP Billiton has been designed, are getting ready for large scale production. However, the JV is still subject to competition authority analysis. The Australian watchdog will decide end of July, but other countries will be investigating much longer. Getting the Pilbara operations on steam is crucial for Rio’s iron ore supply position to China.

Priority 6 – Develop M&A Decision scenarios

The share price of his company will be a major concern for mr. Albanese. The market capitalization has not really recovered after the first hit of the crisis. The low prices in the industry enable many strange merger and acquisition moves. Albanese survived the acquisition effort by BHP Billiton started late 2008, but will need to be prepared for potential new moves.

Priority 7 – Strengthen relationship with China

A revolutionary deal with Chinalco involving $20bln investment by the Chinese collapsed in June 2009 as shareholders did not support the board’s intentions. With China being the single most important country for development of Rio, which is very dependent on iron ore exports, Albanese will have to find other ways to build relationships with the key decision makers in the country.

Priority 8 – Manage capital projects portfolio

Rio is planning to invest only some $5bln in 2010. However, the projects on which the money will be spend are of strategic importance to the company. Extension of Diavik diamond mine, Building of the AP50 aluminium plant, and development of Oyu Tolgoi Copper mine in Mongolia are the most important capital projects in the development phase.

Priority 9 – Improve operational delivery

Where cost cutting is one of the top priorities, increase output volumes is another key issue. Especially the output of the aluminium operations has been disappointing in recent years. Albanese will be closely monitoring the delivery excellence programs in Madagascar (new industrial minerals asset), Queensland (Clermont thermal coal and Kestrel coking coal) and the aluminium business unit.

Priority 10 – Focus exploration program

Finally, Rio’s exploration program needs renewed focus, mainly in the areas of iron ore and copper. The new Mongolian asset and a potential Bingham canyon extension could secure copper output for some time. The difficult relationship with Guinean government very much increases the need to find new iron ore, as the Simandou development can not be expected to be finished quickly.

Sources: Rio Tinto annual report 2009, Rio Tinto annual review 2009, Rio Tinto investor presentation February 2010

©2010 – thebusinessofmining.com

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