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Posts Tagged ‘earnings’

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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Anglo American lifted by commodities boom

July 29, 2011 Comments off

“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

Newcrest Earnings Surge as CEO Steps Down

February 11, 2011 Comments off

“Newcrest Mining Ltd. Chief Executive Ian Smith unexpectedly resigned from the world’s fifth-largest gold miner Friday, as the company said fiscal first-half net profit more than doubled to 437.8 million Australian dollars ($439.4 million) from a year earlier.

Mr. Smith, who took over as head of the company in July 2006, said he was leaving to ‘pursue other areas of personal interest’ and would be handing over to Greg Robinson, the company’s executive director of finance. His resignation surprised many in the market, who had expected to see Mr. Smith enjoy the fruits of his labors after turning the company around and completing the acquisition of smaller rival Lihir Gold Ltd. in September.”

Source: Wall Street Journal, February 10 2011

Observations:

  • Newcrest bought and quickly integrated Lihir last summer in an $8bln deal, almost doubling the production capacity of the company.
  • In the wake of the financial crisis and with the increase of the gold price over the past decade directors of gold miners seem to see a lot of worth in finding CEOs with a solid financial background. Barrick’s Aaron Regent, Newmont’s Richard O’Brien, GoldField’s Nicholas Holland, and Newcrest’s Greg Robinson all held CFO positions prior to being appointed CEO.

Implications:

  • Mr. Smith is mentioned to potentially take a top position at either BHP Billiton or Rio Tinto. However, he denies having any concrete plans for a future executive job at this moment. CEO positions at both Anglo American and Vale might become available in the near future: Anglo’s Cynthia Carroll has completed a successful turnaround of the company, while Vale’s Agnelli sees the term in which he turned the domestic champion into the world’s second largest miner end this May. Vale’s board is likely to either give Agnelli a new term or to appoint another Brazilian CEO to ensure good political ties with the government.
  • Expansion of the current group of diversified miners into gold mining should not be ruled out. As they currently hold minor positions in the precious metals market, this might be one of the fields where large deals are still approved by regulators. However, with current gold prices any deal would be based on very high valuation and closed at a high price.

©2011 | Wilfred Visser | thebusinessofmining.com

Rio Tinto: Reinvigorated, but worried about volatility

February 10, 2011 Comments off

“Chairman Jan du Plessis said ‘This year’s record results reflect a combination of strong
commodity markets
, first class assets and excellent operational performance at our managed
operations. We are in a significant growth phase and have multiple opportunities to pursue. Our strategy
remains the same, and our strengthened balance sheet means we are in a good position to
deliver on this. We will continue to make substantial investments in value-adding organic
growth
and targeted small to medium-sized acquisitions.’

Chief executive Tom Albanese said ‘Rio Tinto is reinvigorated, running strongly and benefiting from favourable markets. GDP growth in emerging markets and supply constraints mean the
general market and pricing outlook for commodities remain positive, albeit with elevated risk.
In particular, the timing and speed at which post-global financial crisis stimulus packages are
removed have the potential to generate both volatility and substantial swings in commodity
prices
. We are well placed to cope with the risks of both short term volatility and long term
demand growth. In 2010, by safely running many of our operations at full capacity we more than doubled our underlying earnings to $14 billion. Our leadership in operational performance was
demonstrated by record iron ore production from our world class Pilbara operations.'”

Source: Rio Tinto press release, February 10 2011

Observations:

  • Gross revenue for the year was $60.3bln, about 8% above analyst concensus estimate. Key revenue drivers were high iron ore, coal, and copper prices.
  • Earnings increased 122% to $14bln. Price increases led to a 151% increase, but exchange rates, inflation, energy costs, and increasing operational costs reduced the increase. Volumes increased slightly, primarily in the Pilbara iron ore operations.
  • Earnings Per Share of 735$ct are in the range of analyst expectations.
  • Rio Tinto launched an extensive report on the outlook for metals and minerals by Vivek Tupulé, the group’s Chief Economist. The report expresses concern about the high inflation in China and the potential impact of interest rate resulting increases for the resources industry.

Implications:

  • The prudent growth outlook, framed by both the chief economist and CEO Albanese, refuel the industry debate about the short and long term sustainability of Chinese growth. Shares of Rio Tinto dropped over 2% pre-market in New York (vs. just over 1% for basic materials peers), indicating that worries come as a surprise to part of the investor community.
  • The high commodity prices have helped the company to rebuild a healthy balance sheet. With current level of cash generation the announced share buybacks and the $11bln capital expenditure for 2011 should not impede the company to continue searching and bidding for sizeable acquisitions. The company might benefit from its relative low activity in acquisitions in the past years to gain regulatory and public approval for deals around the world that would currently be harder for rival BHP Billiton to pursue.

©2011 | Wilfred Visser | thebusinessofmining.com

Xstrata beats expectations thanks to copper price

February 8, 2011 Comments off

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

Glencore to reshape board as IPO looms

January 26, 2011 Comments off

“Glencore plans a board shake-up as the world’s largest trading house heads towards a $50bn-$60bn public listing in London in the second quarter of the year. The Swiss-based trading house is talking to many current and former executives in the natural resources world about potential roles as senior non-executive directors for its new board, according to people familiar with the discussions.

Ivan Glasenberg, the South African chief executive of Glencore, recently held talks with Tony Hayward, the former BP chief, about a role as non-executive director in the trading house. Glencore has also held talks with Chip Goodyear, the former chief executive of BHP Billiton, the world’s largest miner by market capitalisation.

Bankers expect Glencore will disclose its plans for a $50bn-$60bn IPO in mid-March, when the trading house reports its annual results. But the trader is keeping its options open and it could still seek a merger with Xstrata, the miner in which it owns a dominant 34 per cent stake.”

Source: Financial Times, January 23 2011

Observations:

  • Glencore is one of the world’s largest private companies. However, it is experiencing growth problems as it can’t raise money to grow by issuing more equity. Furthermore the company needs to prepare for enormous payouts to top executives leaving the firm, which could cause liquidity problems. Going public would solve these problems.
  • The trading house, owning large stakes of various mining companies, showed strong profit growth for Q3 of last year, mainly driven by booming agricultural commodity prices.

Implications:

  • Most likely Glencore will have to perform an IPO before it can merge with Xstrata, as this is the easiest way to figure out the value of the company. Estimates of valuation of the company are based on a bond it issued at the end of 2009 and on industry multiples (PER of 14-18).
  • Various insiders question the probability of success of a merger with Xstrata, as the corporate cultures of the extremely results-driven trading house and the more relaxed mining house could clash. A merger between the two companies would produce the first fully vertically integrated natural resources major, which could open the door to new ways of negotiating with clients and new types of contracts.

©2011 | Wilfred Visser | thebusinessofmining.com