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Posts Tagged ‘diversification’

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

Copper wars: Barrick outbids Minmetals for Equinox

April 26, 2011 Comments off

“Barrick Gold Corporation announced today that it has entered into a support agreement with Equinox Minerals Limited for Barrick to acquire, through an all-cash offer, all of the issued and outstanding common shares of Equinox (including the shares represented by Equinox’s CHESS Depositary Interests) by way of a friendly take-over offer. The Offer is for C$8.15 per Equinox share in cash, or a total of approximately C$7.3 billion. The Offer represents a 30% premium based on Equinox’s closing share price on the Toronto Stock Exchange on February 25, 2011 (the last trading day before Equinox announced its intention to make a take-over bid for the common shares of Lundin Mining Corporation). The Offer also represents a 16% premium over the per share price under the offer for Equinox proposed by Minmetals Resources Ltd. on April 3, 2011 (which offer has not yet commenced).”

Source: Barrick Press Release, April 26 2011

Observations:

  • Barrick’s appearance as a white knight is a surprising turn in the copper wars, which started in January when Inmet and Lundin announced plans to merge into Symterra
  • Minmetals dropped its bid for Equinox the day after Barrick’s offer, saying that entering into a bidding war would destruct value for its shareholders.

Implications:

The bid by Barrick has two interesting implications: a continued uncertainty about consolidation in the copper industry; and changing dynamics in the relationship between gold and copper miners.

  • Consolidation in the copper industry: although Minmetals appears not to enter into a bidding war, other offers for Equinox might follow. The incentive to keep Barrick out of the copper industry might trigger players like Freeport-McMoran and Xstrata/Glencore to make an offer. Furthermore the players that started the copper wars, Inmet and Lundin, are available as takeover or merger targets again.
  • Copper vs. Gold dynamics: Barrick’s entrance into the copper arena is a significant change of strategy for the gold miner. Its Chilean copper operations did not account for more than 10% of revenue until now, but the copper output will be doubled by adding Equinox’ capacity. Operational synergies with Equinox’ assets in Zambia and Saudi Arabia will not be achieved, thus the acquisition is purely a move for increased diversification. Other gold miners, sitting on piles of cash, might follow Barrick’s strategy.

©2011 | Wilfred Visser | thebusinessofmining.com

An acquisition in aluminium: Vale of the trolls

May 10, 2010 Comments off

“A deal with Norway marks a change of course for a Brazilian mining giant … For Vale, ridding itself of its aluminium business, its third-biggest source of revenue after iron ore and coal, marks a significant change of course. Its purchase of Inco, a Canadian nickel miner, in 2006 and its failed attempts in 2008 to take over Xstrata, another big competitor, indicated that Vale’s strategy was to become a diversified global mining giant like Rio Tinto and BHP Billiton. But now, as Jordi Dominguez, an analyst at HSBC, puts it, the Brazilian company is ‘de-diversifying’.”

Source: The Economist, May 6 2010

Observations:

  • Vale has done a significant investment in the iron ore business and in the same week as sold its aluminium business.
  • HSBC and the Economist interpret these transactions as a significant change of course for the company. Where the company has been trying to diversify in the previous years, the Economist suggests Vale will focus more on the iron ore business.
  • The reason Vale has given for their ‘portfolio restructuring’ is the uncertainty of cheap energy supply in Brasil, which is crucial for a sustainable profitability of the aluminium business.

Implications:

  • One of the key messages of Vale’s latest investor presentation was that it would invest more in fertilizer nutrients. One of the major projects coming on steam is the Tres Valles copper project. These signs cannot really be explained as “de-diversification”.
  • HSBC and the Economist are likely to have drawn their conclusions too rapidly. Vale has reduced the risk in an important part of its business in a sound deal, at the same time reducing its dependency from the Brazilian government.