Posts Tagged ‘gearing’

Mining Week 23/’12: Investment dilemmas for BHP and Fortescue

June 3, 2012 Comments off

Top Stories of the Week:

  • Rumour around retention plan for Xstrata executives
    • Several major shareholders have voiced discontent with the approx. $370mln retention bonuses for the top 72 executives of Xstrata that has been made part of the vote on the Glencore-Xstrata merger.
    • Sources: Financial Times 1; Financial Times 2; Wall Street Journal
  • Australian state governments fight for BHP investment
    • BHP Billiton received environmental clearance for the expansion of Port Hedland’s iron ore harbour. The project could cost around $20bln up to 2022 to increase export capacity to 350Mtpa.
    • The government of Southern Australia is pressuring BHP to start the expansion of its Olympic Dam copper/uranium project before the end of the year, threatening not to extend the permits. The Olympic Dam expansion is one of the key projects that might be cancelled or delayed as BHP tries to limit investment and return money to shareholders.
    • Sources: Bloomberg; Business Spectator; Financial Times
  • Fortesque worries about debt servicing
    • Fortescue, Australia’s third largest iron ore miner, is close to completion of an expansion that will enable it to export 155Mtpa iron ore.
    • The CEO of the company has indicated that it will focus on repayment of debt before undertaking further expansion. The company has received negative feedback from investors because of its high gearing. Its Debt/Equity ratio stands at approx. 45%, versus 26% for Vale and Rio Tinto and 15% for BHP Billiton.
    • Sources: Fortescue media release on expansion progress; Wall Street Journal; 9News

Trends & Implications:

  • If BHP decided to press on with the Port Hedland expansion at the expense of large development projects in other business units that would be a next sign that the supermajors are preferring the relatively predictable iron ore market over further diversification. Both Rio Tinto and BHP Billiton are considering sale of their iron ore business, BHP is in the process of reviewing the options for its Australian manganese operations, and Vale reached a deal last week to dispose its coal operations.
  • The proposed retention bonuses for the top 72 managers of Xstrata add up to around $370mln, an average of some $5mln per person, 4% of last year’s profit, roughly 1-2 annual executive salaries per person, about $0.8 per share, or some 0.1% of share price. The bonuses are set up to keep the managers with the company for at least another 3 years. Even though we are talking about a lot of money that could trigger ethical debate about the executive pay in the industry, the shareholders hardly have any ground to protest the plan from a business perspective. Retention of the top managers after the merger should certainly enable the company to get a quick payback on the $370mln.

©2012 | Wilfred Visser |

Vallar poised to raise Bumi Resources stake

April 7, 2011 Comments off

“Vallar is moving ahead with plans to expand its stake in Indonesia’s biggest coal company, as its metamorphosis into a sizeable miner gathers momentum. The London-listed cash shell founded by financier Nat Rothschild stands to gain an indirect controlling stake in Kaltim Prima Coal mine – the world’s largest thermal coal mine – by increasing its shareholding in Bumi Resources, which operates the mine, to 51 per cent later next month.

Bumi Resources, the coal miner owned by Indonesia’s Bakrie family, has a majority stake in KPC, according to the company’s website, while India’s Tata holds 30 per cent. Andrew Beckham, chief financial officer of both Bumi Resources and Vallar, said he expected the Bakries to approve a plan to increase Vallar’s 25 per cent stake in Bumi Resources via a share swap expected in May. However, in an e-mail, he hinted at uncertainty as to how the transaction would occur.”

Source: Financial Times, April 6 2011


  • The proposed share swap between Bumi and Vallar will give the Bakrie family a majority share of Vallar, but the family will not have the majority of voting rights. In return Vallar, by owning 51% of Bumi, will gain control over the assets of the group, which will then be renamed Bumi plc.
  • Vallar was created last year and listed on the London Stock Exchange in July. After the transactions in Indonesia, which will be completed with the share swap discussed above, the company aims to expand the portfolio with other areas of the world. In January the group was reported to be in the market for $1bln coal assets in America or Australia, but this deal did not yet materialize.


  • In order to grow further into a FTSE100 coal player the company needs to find assets that can be managed in clear synergy with the Indonesian assets. Total acquisition value the founders were looking for was up to $7.5 bln, of which less than half has been spent so far. Cheap debt helps the company to achieve high gearing in acquisitions.

©2011 | Wilfred Visser |

Capital Structure after the Crisis

November 15, 2010 Comments off

The global recession has forced many companies to reevaluate their capital structure. Both the cost of debt and the likelihood of bankruptcy at high debt levels increased, offsetting the benefit or reduced tax expenses at high debt levels. It is therefore no surprise that the largest diversified miners have decreased their gearing. They have benefited from increasing commodity and share prices to reduce debt stake of firm market value to around 33% ((D/E); or 25% in D/(D+E)), in line with the industry’s historical average. A year ago Ernst & Young observed in a report on debt in the mining industry that the gearing had increased to 46%.

Liability comparison
The liability breakdown based on market value of equity for the 4 major diversified miners shows the strong position of BHP Billiton (Figure 1). The 86% equity in the financing mix, combined with over $12bln in cash, gives the company an enormous financial flexibility. Anglo American struggles to keep up with the other majors at a total of 66% equity (gearing of approx. 50%).

The Book Value liability comparison does not show significant differences. The relatively large portion of common stock in Vale’s balance sheet mainly indicates that the company issued large amounts of stock more recently than the other companies.

Figure 1 - Liability structure comparison


Asset comparison

Figure 2 - Asset comparison

While gearing of the companies varies quite a bit, the asset base is remarkably similar (Figure 2). The assets of the large miners typically show approx. 67% Plant, Property & Equipment (PP&E). The most obvious variation among the companies is the percentage of “other fixed assets”, which hold the goodwill created by paying a premium in acquisitions of other companies. Rio Tinto’s balance sheet still holds $14bln goodwill (33% of total assets), mainly because of the acquisition of Alcan in 2007. The relatively high percentage for Anglo American is not caused by goodwill but by a high proportion of long term investments in other companies.

Another important difference is the percentage of cash carried by the various firms. While the diversified miners typically need approx. 2-3% of asset value as operating cash, BHP Billiton holds 14% ($12bln), signaling a pile of excess cash held as a war chest for potential acquisitions. Rio Tinto’s cash at 4% of asset value is a healthy level, but indicates the company does not have much flexibility for acquisitions and/or capital projects in the short run.


Company specifics

The figures below show the evolution of asset base and capital structure of each of the four miners over the past 4 years.

BHP Billiton

BHP Billiton has maintained a stable asset base over the past years, using the large profits to slowly build a war chest for acquisitions. After the failure of the bid for Rio Tinto in 2008 and the potential failure of the bid for PotashCorp of Saskatchewan this year the company will have to reconsider announcing a superdividend or repurchasing shares to give cash back to shareholders.
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BHP results underline financial strength

August 25, 2010 2 comments

“BHP Billiton, the Anglo-Australian miner that last week launched a $39bn hostile bid for Canada’s PotashCorp, has reported its second best full-year net profit on record fuelled by strong growth in earnings from its petroleum and base metals operations.

The Melbourne-based miner, the world’s biggest, underlined its financial clout when it said on Wednesday that it generated $17.9bn in cash flow from its operations, with net debt falling to $3.3bn and a gearing ratio of 6 per cent.

Profits on a pre-tax basis rose from $11.6bn to $19.6bn in the year ended June on revenues that increased from $50.2bn to $52.8bn. After-tax profits grew from $5.9bn to $12.7bn, falling short of forecasts of around $13.3bn.”

Source: Financial Times, August 24, 2010


  • BHP has managed to increase output by $2.9bln while improving operating performance by $0.3bln. The improvement vs. 2009 is mainly explained by higher copper, base metals & petroleum margins. Revenues and profits do not yet come close to pre-downturn levels, mainly because of lower iron ore prices in the second half of 2009.
  • The published project pipeline shows that the Navajo St. Energy Coal project has been dropped in the feasibility stage in the past year.


  • Main take-away from the executives’ Outlook presentation is the expected slowing of government-driven growth in China and Europe. The board appears to be trying to lower expectations for next year’s results.
  • The net gearing of the company of 6% is stressed to demonstrate the ability to increase debt in order to purchase PotashCorp. This figure is the most positive leverage-related ratio from the balance sheet. The regular debt-to-equity ratio (debt/equity) is 80% and will exceed 100% after the acquisition.

©2010 | Wilfred Visser |

Vedanta buys Anglo’s zinc mines for $1.34bn

May 12, 2010 1 comment

“Vedanta, India’s biggest mining group, expanded its international operations yesterday when it agreed to buy Anglo American’s zinc mines in Namibia, South Africa and Ireland for $1.34 bn.
The all-cash transaction will help Anglo pay down year-end net debt of $11bn and bring its gearing level lower.”

Source: Financial Times, May 11 2010


  • Anglo American announced the sale of non-core assets in October last year. The company is trying to regain momentum by focusing more on the core competencies around iron ore, coal and platinum.
  • Vedanta will pay all cash from a war chest of over $7 bln, enabling them to make more moves like this in the near future.
  • Anglo American is burdened by its high gearing and resulting interest expenses.


  • Anglo’s strategy of announcing non-core assets seems to be paying of. Five serious parties were bidding for the Zinc-assets, with Vedanta finally paying a large premium. Other companies bidding are likely to include Vale, Xstrata and Chinese companies.
  • Vedanta is betting on a strong zinc-price due to demand for galvanization (coating steel with zinc to prevent corrosion). With this transaction zinc accounts for over 50% of the companies profits, which makes it very sensitive to volatility. The company will need to choose to continue its focus on zinc and copper or try to invest additionally in aluminium and/or iron ore in order to become more diversified.
  • Vale will be likely be prepared to pay a larger premium for Anglo’s potash asset in Brasil. The company declared the potash business to be a key priority, recognizing the fertilizer business will drive growth in this are in the coming decade.