Archive

Posts Tagged ‘price’

Mining Week 31/’12: Falling prices, falling profits

July 29, 2012 Comments off

Top Stories of the Week:

  • Vale’s profits down on lower prices
    • Vale reported profits below analyst estimates and 60% down versus the same quarter last year. The benchmark price of iron ore has dropped to $120/wmt, at part with the price floor identified by the company last quarter.
    • After the first quarter Vale reported a 45% drop in year on year profits, driven by both volumes and prices
    • Sources: Vale press release; Financial Times
  • Anglo, Teck, Gold miners down on lower prices
    • Lower commodity prices and rising costs resulted in earnings drops of 55%, 65%, and 35% for Anglo, Teck, and Barrick.
    • Anglo announced delay of its flagship development iron ore project in Brazil, Barrick announced large cost overruns for its Pascua Lama project in Argentina, and Teck recently tuned back on a large copper expansion project in Chile. They are all reviewing the balance between project investments and shareholder returns.
    • Sources: FT on Anglo; FT on Teck; WSJ on Barrick
  • Anglo pays $0.6bn for controlling stake in Mozambique coking coal project
    • In a rare move amidst cancellation of development projects across the industry Anglo made the move to buy 59% of the 1.4Bt Revuboe coal project in Mozambique. The project is a JV with Nippon and Posco and is planning to start production of 6-9Mtpa by September 2013.
    • Sources: Financial Times; Anglo press release

Trends & Implications:

  • Dropping prices + increasing costs = review of development. Most non-agricultural commodity price indices have dropped 20-40% over the past year. Where a year ago the focus of most miners was to bring new projects online as fast as possible, attention has shifted to cost containment and ‘disciplined capital investment’. The focus on building projects is stretching capacity of contractors, making capital and operating costs increase rapidly. As a result the projected returns of projects deteriorate, forcing companies to reconsider their portfolio of development plans.

©2012 | Wilfred Visser | thebusinessofmining.com

Breaking down BHP Billiton’s iron ore production costs

September 29, 2011 2 comments

BHP Billiton organized a site tour of its Western Australia Iron Ore operations this week, providing valuable information about its production costs:

Source: BHP Billiton Site Tour Presentation, September 27 2011

Observations:

  • 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.

Implications:

  • 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

China intensifies purchases of copper

September 1, 2011 Comments off

“Chinese companies and investors are stepping up their purchases of industrial commodities such as copper, in a show of confidence in the global economy that stands in contrast to the turmoil in western markets. The wave of buying is providing support for metals and minerals prices after commodities prices fell this month at worries about a double-dip. Senior executives at trading houses, mining companies and banks said Chinese consumers had used the recent drop in prices to rebuild stocks.

‘China is significantly less pessimistic relative to people in the western world,’ said Raymond Key, head of metals trading at Deutsche Bank. ‘On dips they are restocking, especially in copper.’ An executive at an important Chinese trading house added: ‘There is no doubt some traders have been buying [copper] recently.’”

Source: Financial Times, August 30 2011

Observations:

  • The global copper trade is transparent because of the unknown size of stocks at various points in the process, as indicated below. Especially the size of ‘bonded warehouse stocks’, which are often controlled by governments, can only be estimated.
  • Traders estimate the size of the government controlled bonded warehouse stocks to have halved over the past months, leading to a high demand for copper as stock have to be rebuilt.

Implications:

  • The copper trading chain shows the effect of the bull whip syndrome: small changes at the end of the chain result in large impact at the start because each player tries to anticipate the next moves. Copper price decreased as consumers were reducing stocks, trying to avoid buying on the top of the market. At the same time players all along the chain try to reduce stocks and inventory to minimize working capital. As soon as shortage of stocks forces consumers to start buying, prices shoot up because of a lack of reserves along the chain.
  • The Chinese State Reserve Bureau (SRB) holds large stocks in bonded warehouses, but it is unknown how large these stocks really are. The SRB can use these stocks to influence global prices and at the same time the metal stocks are used as a means to reduce holdings of foreign currencies by buying physical stocks. Overall the controlled stocks should be expected to reduce spikes in demand and supply, as a relatively stable copper price is important for China’s manufacturing industry.

©2011 | Wilfred Visser | thebusinessofmining.com

Iron ore to stay above $150, says Vale

July 12, 2011 Comments off

“The price of iron ore will remain above $150 a tonne for at least the next five years, according to Vale, the top miner of the ­commodity. The bullish prediction by Guilherme Cavalcanti, finance director of the mining group, is the latest contribution to a debate on the outlook for the iron ore market that has polarised analysts and investors.

Used to make steel, iron ore is the largest contributor to the profitability for the three largest mining groups: BHP Billiton, Vale, and Rio Tinto. And if Vale’s forecast is correct, the three companies’ shares would be expected to rise sharply.

Asked how long he expected prices to remain above $150 a tonne, Mr Cavalcanti said ‘at least the next five years’, arguing that miners would struggle to meet booming Asian demand. His prediction, in a video interview with the Financial Times, runs against consensus thinking.”

Source: Financial Times, July 6 2011

Observations:

  • Vale’s finance director explains he is not concerned about high inflation in China as mainly the consumer goods price inflation is high, while construction activity still ensures full offtake of Vale’s production.
  • Commodity swaps indicate the market expects prices to decline steadily over the coming years.

Implications:

  • While Vale expects Asian demand for iron ore to stay strong, the companies mainly sees restrained production because of delayed development projects (often because of environmental permitting issues) and weather influences as the key driver for high prices. Together with the high inflation in equipment costs and the relatively weak dollar iron ore prices will for a prolonged time be very elastic to supply.
  • Vale’s share price is lagging behind the price of its main competitors over the past years, resulting in higher cost of debt and reduced ability to perform share based M&A. With Vale’s large exposure to the iron ore price the company would benefit strongly from higher iron ore price expectations in the market.

©2011 | Wilfred Visser | thebusinessofmining.com

The Economist: the wacky world of gold

June 2, 2011 Comments off

“Gold is not like other commodities. … Yet gold miners’ shares have failed to keep pace. This is new. Gold and gold-mining shares used to rise and fall in lockstep. Over the past five years, however, the price of gold has trebled while the value of gold miners has merely doubled. Investors in firms that shift, crush and process rocks are more grounded, it seems, than those who invest in bullion.

As mines age, extracting gold gets harder and costlier. Ores give up less of the metal—average grades have fallen by 30% since 1999 according to GFMS, a consultancy. And ore must be hauled up from ever greater depths. Fuel is pricier. So, too, are labour and equipment, since the global minerals boom has driven up demand for miners and drills.

Finding new seams to replace depleted ones is becoming harder. Metals Economics Group, a mining consultancy, estimates that in 2002 gold miners spent $500m on exploration. By 2008 they were spending $3 billion but finding much less. All the easy gold has been mined already.”

Source: The Economist, June 2 2011

Observations:

  • The Economist identifies several reasons for the share price of gold mining companies to stay behind compared to the gold price: hedging limiting many miners benefits; increasing geopolitical risks; commodity diversification of gold miners; and the emergence of other methods to invest in gold.
  • The article mentions investment demand as the most important source of demand for gold. However, although this demand class is increasing in importance, demand for jewelry (mainly in India and China) still is the most important source of demand (see UBS-graphs below).

Implications:

  • The Economist fails to realize the importance of the supply side impact on the gold price. Miners are not the only source of gold in the market. Over 25% of supply is ‘scrap gold’, recycled from either jewelry or devices. Furthermore, historically the sales of gold reserves by central banks has strongly impacted the gold price.
  • Another important aspect of the gold supply dynamics not mentioned in the article is the development time lag: from investing in the search for gold to producing the first gold will easily take 5-10 years. The boom in gold exploration triggered by the high gold prices is now starting to result in supply increases, with production exceeding the previous 2001 peak. If gold prices stay high, the world will certainly see a slow further capacity increase.

©2011 | Wilfred Visser | thebusinessofmining.com

Iron ore’s stability keeps miners strong

May 30, 2011 Comments off

“After the recent carnage in commodities markets, iron ore stands out for its price stability. The commodity used in steelmaking has been trading at around $180 a tonne for most of the month, just as the costs of raw materials ranging from crude oil to copper and cotton have gyrated wildly.

Prices peaked in the first quarter above $190 a tonne – a record high – and have been trading in a narrow band between $185 and $175 for most of the last few weeks. This relative stability suggests that physical demand for commodities, particularly from China, remains well supported. It also suggests that mining companies continue to struggle to bring projects in on time and on budget to meet the increase in consumption.”

Source: Financial Times – Commodities Note, May 19 2011

Observations:

  • The iron ore pricing mechanism was changed last year, moving to a spot-price linked price instead of the historic annual benchmark price. As a result the miners have gained more flexibility in setting contracts.
  • Iron ore price increased threefold over the last years, with Asian growth and supply constraints mentioned as the most important drivers.

Implications:

  • Both Rio Tinto and BHP Billiton are planning to increase capacity of iron ore mines in Western Australia significantly, but supply is expected to be short for at least an other couple of years. As Indian ore will more and more be used for domestic steel production the long term prospects of Australian exports are good.
  • The high ore price will trigger development of projects with relatively high cost base, breaking even at prices far above the $50/tonne level. Low cost operations will be operated at maximum capacity while focus at these new high cost operations will be on cost control.

©2011 | Wilfred Visser | thebusinessofmining.com

Tata Steel Profit Increases by 72%

May 26, 2011 Comments off

“Tata Steel Ltd. Wednesday reported a 72% rise in quarterly consolidated net profit from a year earlier due to higher product prices and robust sales growth at its India business, as well as a one-time gain of $561 million on the sale of a plant in Teesside, U.K. The world’s seventh-largest steelmaker by volume said profit for the fourth quarter ended March 31 rose to $937 million, up from $546 million.

Consolidated sales rose 23% to $7.59 billion from $6.17 billion in the fourth quarter, but the earnings margin before interest, taxes, depreciation and amortization shrank to 13.9% from 19.4%. … The Indian operations posted sales of $1.87 billion, with the sales volume at 1.7 million tons. Comparative figures were not provided.

Looking ahead, chief financial officer Koushik Chatterjee said at a press conference that the company’s operations, especially those in Europe, will continue to face cost pressures from escalating raw materials prices, such as iron ore and coking coal. “

Source: Wall Street Journal, May 26 2011

Observations:

  • Europe is Tata’s biggest market, but the largest part of profits come from India, where the company achieved over $400/t EBITDA, compared to less than $100/t EBITDA in other regions. Overall EBITDA margin stands at 14%.
  • Tata expects increasing Indian government expenditure to stimulate the economy as a key driver for growth in the near future.

Implications:

  • The good news for Tata and other steelmakers is that the company has managed to offset the increasing raw materials cost by increasing the price of its products in emerging markets. Though higher steel prices could slow the growth of emerging economies (which China’s government is trying to do anyway), the increase in steel prices is important for steel makers in the region to escape the cost pressure from higher iron ore, coal, energy, and employment costs.
  • Tata is trying to find a new balance in its global operations. It announced a restructuring of its European long products division in order to make it profitable and sold its Teesside plant in the UK. The company tries to strengthen its position in India to benefit from the growth of the Asian market, but is at the same time struggling with the strong and hardly profitable presence in Europe’s mature market.

©2011 | Wilfred Visser | thebusinessofmining.com

%d bloggers like this: