Archive
Mining Week 19/’12: Week of the Investors
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
Mining Week 03/’12: Record setting iron ore miners & dividend increase
Top Stories of the Week:
- BHP Billiton and Rio Tinto deliver record production in Pilbara
This was another record-breaking year in the Pilbara with both quarterly and full year iron ore production. Record global iron ore shipments of 239 million tonnes in 2011 were below production due to extreme weather conditions experienced in the first half of the year. Despite this, Rio Tinto’s Pilbara ports operated at above annualised capacity rates and shipped record volumes of 61 million tonnes in the fourth quarter and 225 million tonnes for the full year.
While scheduled maintenance, tie-in activities and the wet season in the Pilbara are expected to affect Western Australia Iron Ore production in the second half of the 2012 financial year, full year production is now forecast to marginally exceed prior guidance of 159 million tonnes per annum.
- Sources: Rio Tinto press release; BHP Billiton press release; Financial Times
- Vale proposed a minimum dividend of $6bln for the year, an increase of over 50% versus the previous year’s minimum payment and in line with the actual dividend payment over 2011.
- Sources: Vale press release; Wall Street Journal; Financial Times
Trends & Implications:
- Rio Tinto and BHP Billiton continue to build capacity in the Pibara iron ore district. With relatively low mining costs and close proximity to the Asian/Chinese market this iron ore region is the most competitive (and largest) producer in the world. As the output in Pilbara is exceeding expectations and Chinese growth is slowing, exporters in other regions face an uncertain future. The global iron ore market is slowly evolving to a scenario where Brazil and Western Africa supply ore for the European market and the Latin American growth market, and Australia supplies iron ore for Asia.
- Vale’s increase of dividends fits in the trend of recent dividend increases in the industry and is a clear sign of uncertainty in the boardrooms of many companies: organic investment opportunities and development capacity are limited, share buybacks and cash takeovers would increase leverage and vulnerability, and with the uncertainty about future economic developments many companies decide to give the cash to shareholders in an attempt to keep share price high.
©2012 | Wilfred Visser | thebusinessofmining.com
BHP Billiton’s record profits don’t hide industry concerns
“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
Antofagasta Raises Dividend
“Chilean miner Antofagasta PLC on Tuesday doubled its interim dividend after reporting a 54% rise in first-half net profit due to higher average commodity prices and volumes. Chief Executive Marcelo Awad said the miner remains well positioned to deal with commodity-price volatility and relatively strong cost pressures given its low average net-cost position. …
Antofagasta expects global copper output to fall 500,000 tons short of demand this year and forecasts prices to average more than $4.20 a pound in the second half. This compares with $4 a pound in mid-August and a record average $4.26 a pound for a calendar half-year in the first half. Antofagasta reported an 84% rise in first-half earnings before interest, taxes, depreciation and amortization, or Ebitda, to $1.95 billion. Net profit rose 54% from a year earlier to $696.2 million, while the declared interim dividend rose to $0.08 a share from $0.04 a share in the same period a year ago.”
Source: Wall Street Journal, August 23 2011
Observations:
- Antofagasta mainly operates in Chile. The key growth project is the ‘Esperanza’ project close to the operating ‘El Tesoro’ mine. Exploration in Peru, USA, Australia and Pakistan signals the ambition to expand internationally.
- The company is controlled by the Luksic family, which holds approx. 65% of the shares.
Implications:
- Antofagasta appears not to be affected by the strikes that stopped production in other mines in the region, signalling a good relationship of the management with the unions.
- The payout ratio of 11% of profits is above expectations, but below the 35% benchmark the company adheres to. The management is either hoarding cash for a significant investment or is planning to announce a special dividend at the end of the year. Last year a special dividend of 100% was turned out at year end.
©2011 | Wilfred Visser | thebusinessofmining.com
Anglo American lifted by commodities boom
“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
Peabody, ArcelorMittal Sweeten Offer for Macarthur
“The world’s largest private-sector coal miner and the largest steelmaker by output on Thursday sweetened their offer for Australian pulverized coal miner Macarthur Coal Ltd. to around A$4.73 billion (US$5.05 billion), while moving a step closer to success by agreeing to start due diligence on the deal. Peabody Energy Corp. and ArcelorMittal said Monday they would start receiving data and site access from Macarthur from the coming Monday.
St. Louis-based Peabody and Luxembourg-based ArcelorMittal made an indicative A$15.50 per share bid for Macarthur, the world’s largest miner of pulverized steelmaking coal, according to the announcement Monday.”
Source: Wall Street Journal, July 14 2011
Observations:
- Peabody tried to buy Macarthur early 2010, but this offer did not convince the 3 major shareholders (ArcelorMittal, Posco and Citic). In the new offer, announced last week, Peabody teams up with ArcelorMittal in a 60%/40% ownership structure.
- The sweetening of the offer consists of the withdrawal of the demand that a $0.16/share dividend not be paid out by Macarthur. In turn the buyers get access to the due diligence information required to test the offer assumptions and to prepare integration.
Implications:
- It appears Macarthur’s board is cooperative in the deal, opening books and mines for inspection in exchange for a small increase in value for current shareholders (approx. 1% of market value).
- If the deal goes ahead the major shareholders that don’t participate in the takeover will need to decide whether or not to sell their shares. Posco and Citic both are strategic shareholders, but only Posco has interest in retaining access to Macarthur’s products, which will potentially become much more difficult if competing ArcelorMittal increases its ownership stake.
©2011 | Wilfred Visser | thebusinessofmining.com
Anglo American: Restructured and competitive again
“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
Xstrata beats expectations thanks to copper price
Source: Xstrata FY10 Preliminary Results, February 08 2011
Observations:
- Copper, which accounts for 61% of group EBITDA, drives the growth of the profit with its record price levels. Total revenue of $30.5bln is above estimates.
- Earnings Per Share of 1.61 after exceptional items are on the low side of analysts estimates. However, growth prospects, including the acquisition of the majority share in Zanaga iron ore, drive stock price up 1% above natural resources comparables.
Implications:
- Production volume is slightly higher than in past year. However, the price adjusted EBITDA for the year is down 27% because of unfavorable exchange rate and inflation. In the coming year the company will have to show it can ramp up production and benefit from the high commodity prices.
- The 20$ct dividend (return to pre-crisis level) amounts to $586 mln, only a small part of the operational cash generation of the past year. Xstrata plans to approve a $8bln capital projects this year on top of its ambitious expansion program.
©2011 | Wilfred Visser | thebusinessofmining.com
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