- 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
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
Top Stories of the Week:
- Fortescue trading halted in prep for announcement
- Trading in Fortescue’s shares has been halted in preparation of an announcement to be made by Tuesday Sep-18. The company earlier in the week stressed it is in compliance with all its debt covenants, but it is looking to restructure debt as low prices and aggressive expansion investment could result in short-term liquidity problems for the company.
- Fortescue is a rapidly growing iron ore producer active in Western Australia’s Pilbara region. The company is ramping up to produce 155mn tonnes per year (from a current 60Mtpa), but it has lost 50% of its market value over the past 6 months as investors doubt it will manage to finance the investment plans without sustained high iron ore prices.
- Sources: Fortescue announcements; Financial Times; The Australian
- South African trouble spreads beyond Lonmin
- Anglo Platinum shut down its Rustenburg operations this week as employees showing up for work were intimidated by striking colleagues. In the meantime Lonmin’s Marikana operations are still shut down and Xstrata and GoldFields reduced production in precautionary measures.
- Despite talks between Lonmin and unions a deal between the striking miners and the company appears to be a long way off. The gap between Lonmin’s wage increase offer and the demands by the unions is over 100%, and the social unrest and promises made by many leaders make it hard for the unions to accept a deal that is much lower than the initial demands.
- Sources: Financial Times 1; Wall Street Journal; Financial Times 2
- Glencore’s new offer received positively
- Glencore released the details of its new offer for takeover of Xstrata. The increased share ration and deal terms appear to win over a sufficient part of Xstrata’s shareholders to make the deal happen. Qatar’s sovereign wealth fund, Xstrata’s 2nd largest shareholders behind Glencore, did not yet respond to the offer.
- According to the new terms Xstrata’s CEO Mick Davis would have to step down and leave the reign to Glencore’s Ivan Glasenberg within 6 months and the retention package for senior Xstrata managers would stay intact unless Xstrata’s board of directors wants to change it.
- Sources: Glencore documentation; text; Financial Times
Trends & Implications:
- Fortescue might suddenly become the focal point of the next big takeover attempt in the mining industry. Share price has decreased dramatically compared to iron ore majors, and both BHP Billiton and Rio Tinto could realize significant synergies with Fortescue’s operations and projects in Western Australia’s Pilbara region.
- The current low iron ore price has created a situation in which Fortescue’s share price is depressed because operating cash flow does not support the planned combination of investment and debt repayment. Fortescue’s expansion is for a large part finance by debt, loading a company which is worth just over $9bn with over $8bn of debt. BHP Billiton, Rio Tinto, and Vale should all be interested in an acquisition and would be able to get a better deal at debt restructuring because they would pose a lower risk of default to lenders.
- Caused in part by less potential for economies of scale in transportation than the key competitors, Fortescue operates at clearly higher costs (i.e. lower margins) than Rio and BHP. Quickly realizing cost synergies and aligning the project portfolio with the larger portfolio for the acquiring company would/will be the focus of successful integration.
2012 | Wilfred Visser | thebusinessofmining.com
Top Stories of the Week:
- BHP Billiton and Rio Tinto deliver record production in Pilbara
This was another record-breaking year in the Pilbara with both quarterly and full year iron ore production. Record global iron ore shipments of 239 million tonnes in 2011 were below production due to extreme weather conditions experienced in the first half of the year. Despite this, Rio Tinto’s Pilbara ports operated at above annualised capacity rates and shipped record volumes of 61 million tonnes in the fourth quarter and 225 million tonnes for the full year.
While scheduled maintenance, tie-in activities and the wet season in the Pilbara are expected to affect Western Australia Iron Ore production in the second half of the 2012 financial year, full year production is now forecast to marginally exceed prior guidance of 159 million tonnes per annum.
- Sources: Rio Tinto press release; BHP Billiton press release; Financial Times
- Vale proposed a minimum dividend of $6bln for the year, an increase of over 50% versus the previous year’s minimum payment and in line with the actual dividend payment over 2011.
- Sources: Vale press release; Wall Street Journal; Financial Times
Trends & Implications:
- Rio Tinto and BHP Billiton continue to build capacity in the Pibara iron ore district. With relatively low mining costs and close proximity to the Asian/Chinese market this iron ore region is the most competitive (and largest) producer in the world. As the output in Pilbara is exceeding expectations and Chinese growth is slowing, exporters in other regions face an uncertain future. The global iron ore market is slowly evolving to a scenario where Brazil and Western Africa supply ore for the European market and the Latin American growth market, and Australia supplies iron ore for Asia.
- Vale’s increase of dividends fits in the trend of recent dividend increases in the industry and is a clear sign of uncertainty in the boardrooms of many companies: organic investment opportunities and development capacity are limited, share buybacks and cash takeovers would increase leverage and vulnerability, and with the uncertainty about future economic developments many companies decide to give the cash to shareholders in an attempt to keep share price high.
©2012 | Wilfred Visser | thebusinessofmining.com
BHP Billiton organized a site tour of its Western Australia Iron Ore operations this week, providing valuable information about its production costs:
- BHP positions itself in the cost curve around $39/t CIF. Average iron ore price for the year ended June 2011 was $163/t, resulting in a 76% operating margin.
- Combining the data from the two charts above, BHP’s breakdown of total iron ore costs of $39/t CIF China are as follows:
- US$9.4/t – Contractors
- US$7.0/t – Secondary taxes & royalties
- US$4.3/t – Freight, distribution & demurrage
- US$3.5/t – Depreciation, depletion & amortization
- US$3.1/t – Fuel & energy
- US$2.7/t – Raw materials & consumables
- US$2.7/t – Labor incl. consultants
- US$0.4/t – Exploration
- US$5.9/t – Other
©2011 | Wilfred Visser | thebusinessofmining.com
“Rio Tinto revealed a steep decline in output at the world’s largest copper mine, demonstrating the mining industry’s difficulties supplying enough copper to keep up with rising global demand. In the first six months of the year Rio’s share of copper production at Escondida, the Chilean mine that accounted for 7 per cent of global production last year, fell 23 per cent to 118,000 tonnes over the same period in 2010.
The drop at Escondida – whose ownership is split between BHP Billiton, Rio, and Mitsubishi – dragged the miner’s total copper output lower by 18 per cent to 273,000 tonnes. Rio, which published its mine-production report on Thursday, disclosed the drop ahead of BHP, the larger partner at Escondida. The production report came ahead of the big miners disclosing their financial results for the first half.
Copper’s deteriorating supply base has helped push the price of the red metal above $9,000 per tonne this year. Analysts expect supply-side problems to influence Rio’s and BHP’s earnings from copper, despite the high profit margins they are enjoying.”
Source: Financial Times, July 15 2011
- Iron ore, thermal coal, and bauxite production increased by 12%, 18%, and 11% respectively compared to the same quarter last year. Main productivity issues are in copper (-24%) and coking coal (-26%).
- Rio quotes lower grades at the Escondida and Kennecott copper operations as the key reason for the drop in copper production. Weather conditions are the key reason for lower coking coal production.
- Rio Tinto has a very strong portfolio of copper projects, but grades of remaining ore in many old projects is rather low. Other companies mining similar types of deposits face the same issue, resulting in both higher production costs and lower production with the same equipment fleet.
- Iron ore remains the single key driver of Rio Tinto’s financial performance. Production at the key operations of Pilbara and Hamersley increased. With current commodity prices the company is likely to try to increase capacity at both iron ore and (new) copper operations as fast as possible.
©2011 | Wilfred Visser | thebusinessofmining.com
“Rio Tinto and Chinalco today signed a non binding Memorandum of Understanding (MoU) to establish a landmark exploration joint venture (JV) in China. The JV will explore mainland China for world-class mineral deposits and is expected to come into operation in the first half of next year. It is intended that between three and five large area exploration projects will be selected for initial focus by the JV, with the potential for additional regions to be added at a later date. Chinalco will hold a 51 per cent interest in the JV and Rio Tinto will hold a 49 per cent interest.”
“My second idea revolves around assisting China in the search for world class mineral resources in its own backyard within China. In saying this, let me stress that I recognise China has considerable expertise in this area and that a lot of exploration work is being undertaken in China and that new resources are being discovered here. …
There is no “magic wand” in mineral exploration. Success requires highly experienced people, rich databases, a deep understanding of conceptual orebody models, robust research and development teams, appropriate technology, and good management, to name a few. We believe we can bring that expertise and know-how to bear in helping China to find major orebodies on its home soil. I remain happy to discuss these ideas further.”
- Rio Tinto will work with Chinalco in an exploration Joint Venture in which Rio Tinto will hold 49% of the shares. The CEO of the JV will be appointed by Rio Tinto.
- In August of this year mr. Albanese informally invited the Chinese to search for options in which the company could work together.
- While in Beijing, mr. Albanase also signed an extension of the agreement with Sinosteel to expand the Channar mine in the Pilbara region in Western Australia.
- Rio Tinto has been working hard to establish strong ties with Chinese government and companies. With Chinalco as the largest shareholder it holds a good position. However, the refusal to give Chinalco an even larger share and the conviction of three employees for corruption in China did slow down the process for some time. Mr. Albanese has managed well to regain the momentum of discussion.
- BHP Billiton has not yet managed to establish a foothold in the Chinese industry. Whether the company deems the political risk in the country too high, the company is scared away by the operational risk of developing infrastructure (most interesting exploration prospects in China are located far in the inland, making transportation to the markets near the coast challenging), or the company simply did not manage to establish the right connections yet is not clear.
©2010 | Wilfred Visser | BUJEZKKNXD3Z | thebusinessofmining.com