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Mining Week 8/’13: BHP names new CEO

February 24, 2013 Comments off

Top Stories:

  • Oil man Andrew Mackenzie named BHP Billiton CEO
    • BHP Billiton announced this week that CEO Marius Kloppers will step down in May and will be succeeded by Andrew Mackenzie, the current head of the company’s non-ferrous division, who worked for BP for 22 years and who worked for Rio Tinto prior to joining BHP Billiton.
    • Sources: BHP Billiton press release; ABC interview; Youtube Reutersvideo
  • Iron ore prices at 16-month high
    • Benchmark iron ore prices rose to a 16-month high at approx. $160/t this week. A cyclone is nearing the Australian coast, potentially causing supply disruptions in the coming week.
    • Sources: CNBC; Indian Express

Trends & Implications:

  • BHPB’s appointment of a chief executive with extensive experience in the oil and gas business signals a further shift of focus from mining to natural resource extraction in general. Given the importance of cost control in the coming years, and considering the company’s asset base in oil and gas and the limited understanding of the oil and gas industry by most miners, appointing an insider with good knowledge of the full range of assets is a logical choice.
  • The increase of iron ore prices is expected to be a relatively short-term development driven by weather expectations and the annual cyclical demand of Chinese importers. which peaks in Q4 and Q1. Long-term price expectations are still much below the current level as additional production capacity is being added at a high pace.

2013 | Wilfred Visser | thebusinessofmining.com

Mining Weekly 51/’12: Freeport, Xstrata, & Bumi

December 16, 2012 Comments off

Top Stories of December:

  • Freeport diversifies further into oil & gas
    • Copper miner Freeport McMoran surprised the market by acquiring two American oil & gas companies for approx. $9bn, taking on a lot of target debt to make a total deal size of approx. $20bn, the second largest acquisition in the industry this year.
    • Freeport did not request shareholder approval for the diversifying acquisitions, leaving a large part of the shareholder base unhappy with the deal and the stock price dropping approx. 15%.
    • Sources: Freeport presentation; Wall Street Journal; Financial Times
  • Xstrata puts Tampakan project on hold
    • Xstrata’s $5.9bn Tampakan copper project in the Philippines is put on hold while waiting for government approvals: the federal government doesn’t want to give the go ahead before the mining law is reformed, and the local government is opposing the issuance of an environmental permit based on a ban on open pit mining.
    • Sources: Reuters; Sagittarius / Xstrata
  • Bumi, Bakrie, and Rotschild continue their fight
    • The board of Bumi plc has indicated that it favors the Bakrie offer to buy out the assets of the Indonesian coal producer over Rothschilds offer to increase the stake in those assets. Bakrie’s offer implies that the shared ownership of assets by Bumi and Bakrie comes to an end.
    • The board also indicated that it does not intend to sell the stakes in Berau to Bakrie, which would mean the company does not completely revert to a cash shell.
    • Sources: Financial Times 1, 2; Jakarta Post

Trends & Implications:

  • Deloitte published its annual report with the top trends in the mining industry for the coming year: on top of the list is the continued high cost of doing business, which is forcing many companies to reconsider development projects (see Tampakan above). The full list of trends is:
      Deloitte - tracking the trends 2013

    • Counting the costs: Paying the price of bullish behavior
    • Managing demand uncertainty: Conflicting market indicators magnify volatility
    • Capital project deceleration: Quality trumps quantity in the project pipeline
    • Preparing for the M&A storm: Market indicators point to rising deal volumes
    • Governments eye the mining prize: Resource nationalism remains
    • Combating corruption: Miners are being held to higher standards
    • Climbing the social ladder: A new level of responsible behavior
    • Plugging the talent gap: Skills shortages still loom
    • Playing it safe: Using analytics to generate insights and improve safety outcomes
    • At the IT edge: Getting the most out of emerging – and existing – technologies
  • Xstrata’s decision to put the Tampakan project, one of the largest development projects in the copper industry, on hold fits two trends: the increasing importance of alignment with both federal and local governments in developing countries, especially around when governments and legislature are changing; and the hesitance to undertake any large investments in a time of rising costs and uncertainty around demand growth.

2012 | Wilfred Visser | thebusinessofmining.com

Check my latest column in the free online journal The International Resource Journal on the importance of iron ore derivatives.

AEMFC: South Africa’s state owned miner

March 2, 2011 Comments off

“South African President Jacob Zuma launched the new ‘competitive’ State mining company, which will produce 800 000 t/y of energy coal at its first mine and synthetic crude oil from another in 2013. President Zuma turned the first sod at the new R130-million ($18.7mln) 120-employee Vlakfontein coal mine, which is situated 100 km east of Johannesburg and 10 km northwest of the town of Ogies, the first venture of the State-owned African Exploration Mining & Finance Corporation (AEMFC), which envisages being a top-five coal producer by 2020.”

AEMFC CEO Sizwe Madondo tells Mining Weekly Online that discussions with State electricity utility Eskom indicate that the Vlakfontein coal, which will be produced at an initial rate of 800 000 t/y, will be competitively priced. Eskom, which will be the buyer of the Vlakfontein coal, currently burns 115-million tons of coal a year, and expects to be burning 250-million tons a year by 2018.”

Source: Mining Weekly, February 26 2011

Observations:

  • Original launch of the state-owned company at Vlakfontein mine was planned for October 2010, but was postponed for several months. Apart from operating the coal mine the government aims to combine its minority participation in mining companies around the country in AEMFC.
  • The company appears to be mainly focused on Energy minerals (coal, synthetic oil from coal, and uranium). The ambition to be a top-five coal producer by 2020 therefore most likely is based on energy coal production.
  • According to BP’s energy statistical review South Africa accounts for 3.7% of world coal reserves and 4.1% of global production, which makes it the world’s 6th-largest coal producer (behind China, USA, Australia, India, and Indonesia)

Implications:

  • Fears of the ANC government nationalizing mines to benefit from the high profits in the industry have been tempered by the mining minister recently when he rejected a proposal by ANC’s youth organization to start nationalization. However, the existence of a state owned mining company makes the step to nationalize assets easier in case a future governments has a different opinion.
  • The investment climate for developing reserves and obtaining licenses for foreign companies will only become more challenging now that a local state-owned player is competing for the same opportunities. It will be hard for the South African government to prevent corruption and avoid an image of an unlevel playing field.

©2011 | Wilfred Visser | thebusinessofmining.com

Vedanta delivers strong results, but faces operational challenges

November 12, 2010 Comments off

“The company reported revenues of US$4.6 billion and an EBITDA of US$1.3 billion in the first
half of this year due to higher volumes and realisations across all operations as compared with
the corresponding prior period. Operating profit was US$985 million and attributable profit
was US$337 million, a 39.4% share of net income.

US$479 million of free cash flow was generated after investing c. $1.1 billion in growth capex.
Net debt and gearing were $1.6 billion and 11.6% respectively. Gearing is expected to be less
than 40% after completion of the Cairn India acquisition, and is expected to reduce quickly
given the inherent cash generation of the group.”

Source: Vedanta Interim Results Presentation, November 11 2010

Performance:

  • Vedanta, the major Indian diversified mining company (although run from London), posted record profits, mainly driven by increases of zinc and iron ore prices. EBITDA margin of around 40% is lower than for some international competitors, but reflects the broad base of small mines the company owns in India.
  • The company is well positioned to be the supplier of choice for the rapidly growing Indian industry. The extension of its business into oil & gas and utilities helps the group to be rather self-sufficient, making it less dependent from poor national infrastructure than international competitors trying to enter the country

Challenges:

  • Upon analysis of the increase of EBITDA the results are not as strong as initially expected. The increase is fully explained by increase of commodity prices (see figure below). Volumes only increased a little bit, completely driven by iron ore volumes. In terms of cash costs, royalties and other comparable items the performance in the 1st half of fiscal year 2011 was actually worse than in the 1st half of fiscal year 2010.
  • The EBITDA breakdown is partly explained by the challenges the company is facing to comply with the rapid changes in regulatory environment in India. The company is struggling to get new assets up to speed as litigation for environmental and ethical/legal issues is forcing it into defensive positions. Apart from the iron ore operations, the low productivity in its mines does not seem to improve.

©2010 | Wilfred Visser | thebusinessofmining.com

Top 10 Priorities of BHP Billiton’s CEO Marius Kloppers

May 28, 2010 Comments off

Marius Kloppers

What are the things the CEO of the world’s largest mining company is doing? What keeps BHP Billiton’s CEO Marius Kloppers awake at night? What are the categories of his “To Do”-list?

An analysis of BHP Billiton’s latest annual & financial reports, investor presentations and the news about the company in the last months yields a list of 10 issues that are likely to be at the top of Kloppers’ list of priorities. The list holds strategic, operational, financial and relational activities, each of which are scored in terms of importance and urgency. Priority 1 on the list is the lobby on the new Australian mining tax. Priority 10 is improvement of the safety record of the company. Read on for the full list of priorities.

Priority 1 – Lobby against Australian mining tax

The campaign against the super profits tax proposed by the Australian government is currently on top of the list of the CEO. Corporate profits are projected to decrease by over 15% if the proposal is implemented without changes.

Priority 2 – Screen potential acquisition targets

With BHPB’s strong balance sheet and the failed take-over of Rio Tinto in the back of the mind the company will be looking for acquisition targets. Growth by acquisitions should help the company to meet achieve positive growth again in 2010. There are rumours that the company is on the verge of announcing acquisitions in the petroleum business.

Priority 3 – Complete cost cutting projects to restore margin

The margin has taken a major hit in the past two years. Kloppers will need to show the shareholders he is able to restore the margin by cutting costs. Especially the aluminum and stainless steel metals business units will need to cut costs significantly.

Priority 4 – Manage Pilbara Iron ore investment

The iron ore project in Western Australia is by far the largest capital project of the company at this moment. The structure of a JV with Rio Tinto makes additional executive attention is required in order to align the operations and to ramp up production quickly.

Priority 5 – Refinance debt while retaining credit rating

A significant part of BHP Billiton’s debt needs to be refinanced in the coming years. The companies strong balance sheet has helped it to achieve an “A” credit rating. Kloppers will be working hard with the Alex Vanselow, the CFO, to retain this favourable position.

Priority 6 – Get new petroleum projects on steam

Fuel costs are the most important driver of costs in the mining industry. Having a strong petroleum business unit helps to hedge against the likely price increases of oil. BHP has six capital petroleum project in the execution phase (Turrum, Pyrenees and NWS North Rankin B being the largest). The CEO will keep a close watch on the development of these projects.

Priority 7 – Reduce portfolio dependency on steel making

The percentage of BHP Billiton’s sales related to steel making has increased in the past 5 years from approx. 50% to approx. 70%. Although this means the company is well positioned to benefit from China’s growth, it does pose a great risk of volatility. Kloppers will be looking for opportunities to strengthen the aluminium, base metals and diamond business to cover this risk.

Priority 8 – Align with Jack Nasser, the new chairman

Don Argus has retired as chairman and Jac Nasser has started in this position. As the position of any CEO is subject of continuous questions, Kloppers will make sure he is aligning with the new chairman.

Priority 9 – Position for Chinese and Indian growth

BHP expects India to follow the growth trajectory of China. However, the current infrastructure of the company is not yet aligned with the large part of consumption of its goods in Asia. Kloppers will be working on strengthening the focus of both the supply chain and the marketing departments.

Priority 10 – Improve safety record

In 2009 the company had 7 fatalities in its operations. Kloppers will be concerned about getting the safety at all operations at par. Public and legal opinion pressure the executives to undertake additional action.

Link to this article: http://www.thebusinessofmining.com/2010/05/28/BHPBPriorities

Sources: BHP Billiton annual report 2009, BHP Billiton summary review 2009, BHP Billiton investor presentation February 2010

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