Archive

Posts Tagged ‘growth’

Mining Week 4/’13: Caterpillar’s trouble & Bumi’s future

January 27, 2013 Comments off

Top Stories:

  • Caterpillar sees lower sales and fraud at Chinese acquisition
    • Caterpillar’s machinery sales declined 1% over the past 3 months, driven by poor results in AsiaPacific and North America.
    • The news of the mining slowdown hitting the top equipment manufacturer comes at the same time as the announcement of structural over reporting of profits at ERA Mining Machinery, the Chinese manufacturer bought for approx. $700m last year.
    • Sources: Caterpillar press release; Wall Street Journal; Financial Times
  • Bumi board favors Bakrie’s plans over Rothschild’s
    • The only two directors on Bumi’s board who Nathan Rothschild wanted to stay in function have sided with the rest of the board in the support for the plan to have the Bakrie family buy the Bumi Resources assets and separate from Bumi, which would be left with the Berau assets.
    • Rothschild and Bakrie have been in a dispute about the future of the London-listed miner with coal assets in Indonesia for several months. The company said this week that the decisions about the future structure of the group will not be impeded by the ongoing legal probe into financial practices at their assets.
    • Sources: Financial Times; Telegraph; Wall Street Journal

Trends & Implications:

  • The reduction of machinery sales at Caterpillar signals that the peak of new project development has passed. While miners raced to add capacity over the past years, many new projects are now put on hold or downsized. Although Caterpillar can expect to benefit from the forecasted rise increase of global resource requirements over the next decades, the fastest growth is over. Equipment manufacturers are a good indicator of overall growth outlook in the industry as their sales is directly linked to building of production capacity.
  • Bumi’s future appears to be that of an Asian-focused coal company without strong Indonesian shareholders. The tie-up of the Vallar cash shell with powerful Indonesian miners did create a significant player in the region, but the divergent views on corporate governance between the Indonesian and European-based owners has made it impossible to run the company effectively.

2013 | Wilfred Visser | thebusinessofmining.com

Mining week 26/’12: Resource nationalism & slowdown worries

June 24, 2012 Comments off

Top Stories of the Week:

  • Glencore mine in Bolivia nationalized
    • Bolivia nationalizes the Colquiri zinc and tin mine, one of 5 of Glencore’s assets in the country. The government promises to give a ‘fair compensation for equipment.
    • The nationalization comes after several weeks of labor conflicts between Colquiri’s workers and Glencore’s local subsidiary
    • Sources: Wall Street Journal; Glencore press release; La Prensa Bolivia
  • Rio Tinto invests $4bln more in Pilbara region
    • Rio Tinto has decided to spend an additional $3.7bln in the Pilbara region as part of its long-term investment plan.
    • $2.0bln of the funds will be used for infrastructure enhancements to allow the company to meet its output targets. The other $1.7bln will be used to extend the life of one of the largest mines in the area.
    • Sources: Rio Tinto press release; Financial Times; Fox Business
  • Media stress commodity price uncertainty

    • The disparity between performance of global mining stocks and metal prices is triggering debate in banking world and media about the potential impact of a further slowdown of the global economy.
    • Sources: Mining Weekly; Financial Times

    Trends & Implications:

    • The uncertainty about short-term economic developments in both OECD countries and developing economies, most notably China, is causing share prices across the mining industry to lag the current performance of both metal prices. The uncertainty for short-term prospects apparently also affects the long-term outlook for the industry, making investors believe price and profit levels can’t be sustained. As a result, Price/Earnings (PE) ratios are dropping, causing market capitalization to go down despite good company performance.

    ©2012 | Wilfred Visser | thebusinessofmining.com

Antofagasta on track for rapid growth

March 9, 2011 Comments off

“Chile’s Luksic family is due to receive more than $700m (£433m) this year after surging copper prices pushed Antofagasta, the mining company controlled by the family, to declare a special dividend of 100 cents.

A fivefold rise in the pay-out for 2010 offered proof of the copper market’s financial impact on the mining industry. Freeport-McMoRan, the US copper miner, also declared a 100 cents special dividend for 2010 to clear excess cash. London-listed Antofagasta ended last year in a net cash position of $1.3bn after profits nearly doubled.

The completion of a new mine and mine-expansion project allowed it to increase its production volumes at the time that sales prices for the industrial metal were ascending to this year’s highs of about $10,000 a tonne.”

Source: Financial Times, March 9 2011

Observations:

  • The strong results published by the Antofagasta are the result of a 46% price increase and an 18% production volume increase. Production for 2011 is expected to be over 30% higher. Cash unit costs increased 8%, in line with increasing costs shown by other companies.
  • LME Cash Seller Copper Price (March 2010 - March 2011)

  • In relation to the other big copper mining event of the moment: Lundin and Inmet have delayed their special shareholders meeting to vote on the proposed merger to form Symterra to March 28th to give Lundin time to study the takeover offer announced by Equinox. Equinox has not yet submitted a detailed offer.

Implications:

  • No problems have surfaced around negotiations with unions on new salary arrangements. Apparently the high copper price has helped the company to satisfy the unions demands, reducing the risk of strikes.
  • Antofagasta is increasingly looking beyond Chile’s borders for expansion: USA, Sweden, Pakistan, and Australia are mentioned in the exploration pipeline. Although all current production is in chile and the Sierra Gorda, Antocuya and Los Pelambres areas in Chile still hold potential, the company will not be able to sustain growth rates it requires to keep up with Codelco, Freeport, and the diversified miners without expanding abroad. This expansion will require significant managerial and organizational change.

©2011 | Wilfred Visser | thebusinessofmining.com

Mining & Metals Scenarios to 2030

March 4, 2011 Comments off

How will the environment for the global mining and metals sector look in 2030?

Source: World Economic Forum, February 2010

Scenario Design:

  • The World Economic Forum described 3 plausible scenarios of the development of the industry up to 2030 with the objective of challenging the mental frameworks of regulators and people in the industry.
  • The scenarios build on the certainty of population growth and overall increasing demand for commodities.
  • The scenarios diverge in the area of 4 critical uncertain developments: geo-economic; geopolitical; economic; and environmental.

Scenario Outcomes:

  • The Green Trade Alliance scenario sees a world divided between the ‘green’ and ‘the rest’. Global trade is compromised by new environmental standards. Sustainability is a key issue for mining companies.
  • The Rebased Globalism scenario sees high growth in a Multipolar World, in which regulation is mainly local. Stakeholders management is a key issue for the mining industry, in which resources are scarce.
  • The Resource Security scenario sees a breakdown of globalism as governments try to secure access to raw materials. Limited trade and substitution of industrial inputs leads to low growth for the mining industry. Government relations are the most important asset in the industry.

©2011 | Wilfred Visser | thebusinessofmining.com

Oliver Wyman: Commodities bubble

February 15, 2011 Comments off

2015: Based on favorable demographic trends and continued liberalization, the growth story for emerging markets was accepted by almost everyone. However, much of the economic activity in these markets was buoyed by cheap money being pumped into the system by Western central banks. Commodities prices had acted as a sponge to soak up the excess global money supply, and commodities-rich emerging economies such as Brazil and Russia were the main beneficiaries. High commodities prices created strong incentives for these emerging economies to launch expensive development projects to dig more commodities out of the ground, creating a massive oversupply of commodities relative to the demand coming from the real economy. In the same way that over-valued property prices in the US had allowed people to go on debt-fueled spending sprees, the governments of commodities-rich economies started spending beyond their means. They fell into the familiar trap of borrowing from foreign investors to finance huge development projects justified by unrealistic valuations.

Once the Chinese economy began to slow, investors quickly realized that the demand for commodities was unsustainable. Combined with the massive oversupply that had built up during the boom, this led to a collapse of commodities prices. Having borrowed to finance expensive development projects, the commodities-rich countries in Latin America and Africa and some of the world’s leading mining companies were suddenly the focus of a new debt crisis. In the same way that the sub-prime crisis led to a plethora of half-completed real estate development projects in the US, Ireland and Spain, the commodities crisis of 2013 left many expensive commodity exploration projects unfinished.”

Source: Oliver Wyman: The Financial Crisis of 2015, February 2011

Observations:

  • Oliver Wyman, the international consulting firm, recently published a report in which it describes ‘the avoidable history’ of the next financial crisis. It foresees a bubble of commodity prices, caused by cheap money supply to developing countries in reaction to increased regulation in the developed world.
  • Wyman lists a number of prevention measures that should help to prevent the scenario sketched above from happening, removal of subsidies and scenario planning for development decisions being the most applicable to the mining sector.

Implications:

  • The factors Wyman does not include in its analysis are the long development lag of natural resources projects, causing supply to trail demand changes by several years, and competitive dynamics in the industry. Both factors might eventually strenghten the effects described, but a burst 2015 might be a too aggressive timeline.
  • Careful analysis of the sustainability of demand growth in Asia, in particular in China, is crucial for the investment decisions for long term projects in all mining firms, not only the companies that have Chinese customers. Once Chinese demand slows down the global fulfillment dynamics will change, making the low cost suppliers (totalling production and transportation costs) survive.

©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

Analyst expectations for diversified miner’s results

February 7, 2011 Comments off