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Posts Tagged ‘Norilsk’

Mining Week 12/’12: Australian tax passed, but BHP warns for demand

March 24, 2012 Comments off

Top Stories of the Week:

  • Australian Minerals Resource Rent Tax finally approved
    • The tax on high profits for Australian iron ore and coal projects which led to a change of premier in the country was finally passed by the parliament last week.
    • Officials from the mineral rich states of Western Australia and Queensland argued that the taxation should be a state arrangement rather than a federal law
    • Many critics expect the MRRT not to bring in the amount of cash the governments expect because of tax management by the largest players and potentially because of lower profit margins as a result of increasing costs.
    • Sources: Economist; Wall Street Journal
  • Mixed signals on China’s iron ore demand
    • In the same week BHP warned that China’s demand for iron ore is slowing down and the Australian state of Western Australia increased its outlook for exports.
    • BHP still is bullish about long term demand in China and does not scale down its investment programs. However, in the short term the company ‘’gives caution” demand might drive down iron ore price to $120/t
    • Sources: Wall Street Journal; BHP Billiton presentation; Financial Times

  • Power struggle for Rusal amidst debt issues
    • A new chairman was appointed to the board of Rusal and his predecessor, mr. Vekselberg, made public that the company was struggling with large debt problems and said it had management problems.
    • Rusal announced that it would write down a large part of the value of its Norilsk stake in an attempt to restructure its balance sheet.
    • Sources: Financial Times 1; Financial Times 2; Lex Video

Trends & Implications:

  • Various of the large Russian miners are trying to diversify both in products and geographic presence. Key problems the companies appear to encounter are a clash of management and corporate governance styles between Russia and western investors and large debt burdens in combination with the need to reinvest most or all of free cash flow to modernize or expand.
  • Australia basically kicked off a wave of mining taxation overhauls in countries around the world. Given the very large output of coal and iron ore operations in the country the implementation of the MRRT will be the most impactful for the overall profitability of the industry. As many of the new tax regimes are based on progressive operating margin scales and operating margins of most companies are decreasing because of cost inflation, it is questionable if the new regimes will result in the income countries are hoping for in the short term.

©2012 | Wilfred Visser | thebusinessofmining.com

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Lonmin to invest $2bln to boost production

May 10, 2011 Comments off

“Lonmin, one of three South African companies that mine most of the world’s platinum, plans to invest $2bn to restore its production to historic levels of about 1m ounces a year by 2015. In the six months to March, the London-listed miner raised earnings from a low base. Pre-tax profit doubled to $159m despite bigger pay packages for workers, rising electricity costs and the stronger rand which has been eating away at many South African miners’ profits.

Lonmin’s output has declined steadily over recent years, with the miner selling 706,000 ounces of platinum in its year to September compared to over 900,000 ounces in 2004 and 2005.”

Source: Financial Times, May 10 2011

Observations:

  • Lonmin currently depends on the Marikana mine for its entire production. The production increase to 2015 should come from this mine. The Limpopo mine currently is under care and maintenance, while the most company’s most promising growth opportunity is the Akanani deposit with just over 10 Moz platinum reserves. Global platinum production is concentrated in South Africa’s Bushveld complex and Russia’s Norilsk region, while demand mainly comes from car manufacturers in Asia and North America.
  • Lonmin is suffering from quickly increasing employment costs (8% increase over the year) and electricity costs (24% increase). Furthermore the appreciation of the South African rand makes costs increase while revenues (in dollars) are not equally increasing.

Implications:

  • Foreign exchange cost pressures are hurting miners with operations in both developing countries and developed countries in which currencies are not linked to the dollar when the dollar is weakening. With an increasing portion of production shifting to developing countries with high inflation rates exchange rates are becoming more and more important for business evaluation.
  • Several large diversified miners are hesitant to take a stronger position in platinum because of safety issues. Most existing projects have poor safety track records, making acquisition of producing assets a CSR-risk, while development of new projects would require significant capital expenditure and result in long lead times.

©2011 | Wilfred Visser | thebusinessofmining.com

Rusal Net Profit More Than Triples

April 1, 2011 Comments off

“United Co. Rusal PLC said Thursday its net profit more than tripled last year on higher aluminum prices and a strong contribution from 25%-owned OAO Norilsk Nickel. The Russian aluminum giant plans to nearly double capital spending this year to boost capacity in the face of growing aluminum demand.

Rusal CEO Oleg Deripaska said in a statement the company’s strong net-profit growth was driven by significant increases in demand for aluminum and metal prices, and the company expects global demand for aluminium to grow 8% to 43.8 million metric tons this year. He also said aluminum prices will likely remain in a range of $2,500-$2,600 per ton until the end of the year, due to underlying demand and continuing weakness in the U.S. dollar. Prices were volatile last year, ranging from less than $2,000 per ton to as high as $2,500 per ton, he said.”

Source: Wall Street Journal, March 31 2011

Observations:

  • The largest part of annual profit ($2.44bln out of $2.87bln) comes from the share in Norilsk Nickel, a low-cost nickel producer.
  • Bauxite output of the company increased 4% to 11.8mln tons. Rusal operates 8 mines in Guinea and Guyana.

Implications:

  • Cost increase in both alumina and electricity has driven the industry’s break-even price to above $2,200/ton. Predicted demand increases faster than supply, potentially leading to further price increases. However, large trading stocks could supplement supply and keep the price relatively low for several years.
  • Increasing demand partly comes from copper substitution. Rusal benefits in the long term from the high copper price as manufacturers search for alternatives to copper wires.

©2011 | Wilfred Visser | thebusinessofmining.com

Norilsk Nickel back on to solid ground

May 24, 2010 Comments off

“When former KGB officer and state tourism chief Vladimir Strzhalkovsky was appointed chief executive of Norilsk Nickel more than a year ago, investors worried about his lack of experience in the mining industry.

But the tough cost- cutting he has embarked on is highlighting the potential advantages of his former career, as the world’s biggest nickel miner emerged from the crisis with a big lift in net profits that reached $2.65bn last year, far above forecasts.”

Source: Financial Times, May 24 2010

Observations:

  • Administrative & labor cost at Norilsk Nickel went down 36% in 2009.
  • Strzhalkovsky deems a merger with Rusal to add little value to Norilsk’s shareholders.
  • Norilsk will try to sell its majority stake in the American palladium & platinum miner Stillwater Mining.

Implications:

  • Rigorous cost cutting has reestablished Norilsk as a low cost producer. Nickel prices fell in 2007 and have only partly recovered last year. As revenues have decreased, the only option for the company to keep a health margin was to cut costs. With a positive outlook for nickel prices in the future, this is a lasting competitive advantage.
  • Few companies will be interested in buying the stake of Stillwater Mining. The company was making a loss last year and it is very hard to achieve operational synergies for most integrated miners as they don’t have a strong presence in the area of Montana.