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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 | thebusinessofmining.com

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Uranium Miner Expects Profit Hit

October 14, 2010 Comments off

“Energy Resources of Australia Ltd., the uranium arm of mining giant Rio Tinto, on Wednesday downgraded its annual production guidance for the second time this year, and said a strong Australian dollar is hurting its bottom line.

The production shortfall means ERA will have to cover some supply requirements with purchases, further eroding its earnings.

ERA owns Ranger, a major mine that provided 9% of the world’s uranium oxide last year. The company, 68%-owned by Rio Tinto, said the fall in output was caused by disappointing ore grades. Without expansions, Ranger’s ore body is due to run out by 2012. “

Source: Wall Street Journal, October 13 2010

Observations:

  • Energy Resources of Australia also owns the undeveloped Jabiluka Deposit, close to the Ranger mine. However, development of this deposit is subject to the cooperation of indigenous people.
  • Rio Tinto is planning to increase its presence in uranium production through the Kintyre development (operated by Cameco) and Rössing Uranium mine in Namibia. BHP Billiton is the only competitor active in uranium production through the Olympic Dam mine.

Implications:

  • According to the World Nuclear Association, Australia accounted for 16% of global uranium production in 2009. Ceasing of operations at Ranger would more than half this share.
  • The global demand for uranium is likely to increase rapidly as safer small-scale nuclear power generation facilities become mainstream. Given the location of current reserves, Australia will be one of the major producers that will be able to facilitate increases of supplies. The Olympic dam reserves in Southern Australia are the world’s largest reserves.

©2010 | Wilfred Visser | thebusinessofmining.com

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