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The Year’s Top Priorities for Mining CEOs

December 31, 2012 Comments off

With rapidly increasing production costs, metal and coal prices stable or decreasing, and general global market uncertainty, 2012 was not an easy year to be the CEO of a mining company. The boards of many mining companies have drawn their conclusions and decided 2013 will be the year in which a new leader will make a start. These new executives and the veterans that survived 2012 will face many similar challenges in the new year. The market for project development appears to cool down, but cost pressures and decreasing margins are real and volatility is here to stay for some time.

Below 7 key priorities for mining CEOs in the coming year:

1. Watch your balance sheet

Global debt problems aren’t over yet, and a company’s debt is never stronger than the host country’s sovereign debt. A lot of national, regional, and corporate debt is still overvalued. The European financial system being too young to make tough decisions, the American political system being to antique and entangled in corporate interests to make tough decisions, and a new Chinese government being too dependent on international markets and national stability to make tough decisions are not going to help to solve the debt issue anytime soon. A new chapter of the debt crisis is likely start in 2013, creating a volatile environment in which prudent balance sheet management is key for business stability, preventing you from finding yourself standing at the edge of a solvency cliff, as many coal miners and even iron ore miner Fortescue experienced recently. Don’t get deep into debt, and don’t wait ‘till the last moment to refinance maturing debt, as many global developments could make raising money in debt markets suddenly very hard.

2. Kill bad projects

As a result of rapidly increasing product prices and in the knowledge that global demand for most commodities continues to grow over the next 2 decades, the project pipelines across the industry have been filled to the max. However, for most products only about one third of the projects currently being communicated as ‘planned’ is actually needed to bridge the supply-demand gap in the 2025. That means two out of three projects need to be stopped. And yes, that includes some of your projects. Deciding which of the development projects in the global industry actually are the good projects, and which not so good projects do have a chance to succeed simply because they have a powerful developer, is going to be a key task for this year. Simply doing an IRR calculation based on an imaginary product price doesn’t do the trick; there might be plenty of better projects out there that will make your price forecasts miss the mark completely. It’s time to rev up the intelligence on competitor’s projects: in the end the best projects survive. Making sure you get hold of your fair share of good projects is the objective for the coming years. Those projects that don’t pass the test and that happen to be yours? Kill them, and move on to priority number 3.

3. Expedite good projects

Hopefully your assessment of global project potential confirms your view that some of the projects in your pipeline will make the cut. Now do everything you can to bring those projects forward. Counter-cyclical investment has been a mantra of management gurus forever, but very few executives actually dare to execute on it. Redirect the resources you free up by killing bad projects – finances, human capital, and equipment – to those projects that might succeed. This does not only help you to bring those projects forward, it also sends a clear signal to the market that those projects really are the probable survivors of the battle of the fittest projects. If you decided that none of your projects are good enough to make it? Get to work on priority number 4.

4. Buy cheap future growth

Many of the important mines of the end of this decade and of the coming decades are still in the hands of explorers or juniors that don’t have the funds or appetite to develop the projects, that are always on the outlook for the acquirer, and that have seen their share price become much more discounted than the prices of their potential acquirers. Buying current production is expensive as always and will be tough on your balance sheet, but this year is not a bad moment to buy the exploration-stage projects that will make your company great in the long run. Be aware that for many of these projects the development capital, that scares most company executives at this point, will actually only be needed during the next commodity price cycle. And yes, those projects are challenged geographically, politically, technically, and environmentally, but so were most of the current great mines 10 years before they started producing.

5. Be tough on suppliers and contractors

The slump for mining suppliers and contractors lags the slump for miners by about a year. Last year was the moment of the great awakening in mining companies that the period of rapid growth is over; this year their suppliers and contractors will feel the pain. Don’t forget to squeeze your suppliers out this year! With many projects being shelved or stopped the bargaining position of engineering and construction constructors and equipment manufacturers is deteriorating quickly. Over the past years they have enjoyed a situation in which there were simply not enough skilled people and production capacity to serve all of the industry’s wants straight away, but that period is about to be over. Cost pressures are still there, but the mining companies can solve part of that issue by paying less in new procurement and trying to renegotiate existing contracts.

6. Get talent on board when the job market is down

The suddenly emerging reality of thinning margins has made most mining companies very hesitant in recruiting, and has led several companies to reduce the size of the workforce or implement hiring freezes. The job market in the industry does not look good, so people stay where they are. Just as you should be searching for the right projects especially during tough times, you should be on the hunt for ambitious talent when the job market is bad. Good people always want to make the next step, and any period in which making steps is hard is a headhunter’s bonanza. Not only half of Xstrata’s executives is seriously looking for a new challenge away from Glenstrata, but junior, mid-management, and executives in paralyzed companies around the world are sensitive to a good offer at this time.

7. Prepare for the low/now growth era

Most of the young talent you recruit at this point will witness the age of ‘peak mining’ during their career. Riding the wave of development in emerging countries the mining industry’s output will grow over the next decades. Still, driven by demographics, economics, and increasing recycled metal supply, the demand for most mined metals is likely to start a slow decrease around 2040. Your investors don’t really care about anything that happens after 2020, but the talent you are recruiting and the communities you are operating in do care. Rio Tinto’s ‘Mine of the Future’ program is focused entirely on the technological future of mining. However, preparing your company for a new, low or no growth, normal implies exploring a whole new way of doing business, technology only being a minor part. Wouldn’t it be great to be known as the CEO who prepared the company for ‘Mining of the Future’?

Enough to work on to keep the miner’s job interesting in the new year! Do you happen not to be the CEO of your company? Don’t hesitate to forward this text to him/her to make sure the most important to-do list in the company includes these priorities. Happy new year!

2012 | Wilfred Visser | thebusinessofmining.com

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Vale: Roger Agnelli vs. Dilma Rousseff

March 28, 2011 Comments off

Sources: Barclays Bradespar Analyst Report Nov. 2010, Vale SEC Filing FY2010

Observations:

  • Dilma Rousseff appears to have won the battle to replace Vale’s CEO Roger Agnelli, as various Brazilian and international newspapers are reporting a more government-minded chief will be appointed instead of renewing mr. Agnelli’s contract.
  • As displayed above the government has strong control over the world’s largest iron ore miner. Valepar S.A., the controlling shareholder, is 49% owned by state pension funds and the government has large influence on two of the three other major shareholders: BNDES, the state development bank, and Bradespar, a daughter of Brazil’s second largest private bank.
  • Key reason for the Brazilian government to push for replacement of mr. Agnelli is the conflict of interests between the company’s shareholders and the Brazilian government. Vale focused on cost cutting in the crisis while the government would have liked the company to keep employment high; Vale had ore carriers build in Asia, while the government would have like to have domestic shipyards build the ships; Vale tries to minimize taxes and royalties paid, while the government tries to maximize revenues.

Implications:

  • As long as iron ore prices stay high the change of leadership is not likely to have a major impact on Vale’s international behavior. The company will likely get more closely involved in Brazilian steelmaking, potentially allying with Gerdau in development of domestic projects. If prices drop, expansion focus will be more centered on Brazil to please the government.

©2011 | Wilfred Visser | thebusinessofmining.com

Mining Industry Scenarios 2011-2014

March 11, 2011 1 comment

How could the mining industry develop in the period 2011 to 2014?

The mining industry is facing uncertain times. In response to the World Economic Forum’s ‘Mining & Metals scenarios to 2030’ I developed two short term scenarios for the mining industry. Both scenarios describe a plausible, consistent, potential development of the industry in the next 3 years:

 

Scenarios:

  • In Red Wave, China’s government manages to sustain demand growth, resulting in high commodity prices. At the same time China invests heavily all around the world, forcing other miners to focus on organic growth.
  • In Countercurrent, revaluation of the renminbi and high interest rates in China lead to lower commodity demand. Prices decrease across the board. Miners struggle to maintain positive margins. New project development becomes of secondary importance.

Full transcript of the video can be downloaded here

©2011 | 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

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