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Mining Week 33/’12: Coal, copper, iron ore profit drops

August 13, 2012 Comments off

Top Stories of the Week:

  • Harry Winston chooses between BHP’s and Rio’s diamond business
    • Harry Winston, the diamond retailer that holds a 40% stake in Rio Tinto’s Diavik mine in Northern Canada, is in talks with BHP Billiton to buy the Ekati operation, also in the north of Canada. Both Rio Tinto and BHP are trying to get out of the diamond business as they can’t realize the scale in the industry to make it a core business.
    • Titan, part of the Tata group, is rumoured to be interested in an acquisition of Harry Winston and might emerge as a competitor in the consolidation movement in the diamond business with strong financial backing.
    • Sources: Wall Street Journal; Financial Times
  • Xstrata’s profit drops on prices and volumes
    • Xstrata’s operating profit for the first half year dropped by 42%. Approx. half of the drop is attributed to lower commodity prices, the other half mainly to inflation and lower volumes.
    • An important message communicated in Xstrata’s earnings presentation is the potential of the company to continue stand-alone in case the share acquisition by Glencore (supported by Xstrata management) fails. Xstrata’s shareholders get to vote on the deal on September 7th.
    • Sources: Financial Times 1; Financial Times 1; Xstrata presentation
  • Rio Tinto profits down on lower coal and iron ore prices

Trends & Implications:

  • Xstrata is among the few companies that manages to communicate (or achieve) a unit cost reduction in its earnings presentation, probably the largest driver of positive reception of the quarterly numbers by the investment community. By breaking out the ‘uncontrollable’ inflation part the company communicates it has success in cost cutting, even though nominal costs increased year on year.
  • Most large miners are stressing the discipline of their capital investments in the latest presentations they are giving, promising only to invest if a good return can be achieved. The most prominent example of a potential cutback on capital expenditure is BHP’s announcement that it is reviewing the expansion of the outer harbour in Western Australia required to lift iron ore export capacity to the planned level. While trying hard to show the investments are responsible, the companies also try to communicate that ‘the industry fundamentals’ are still solid, mainly using the projected long-term growth of China as explanation. However, Rio Tinto’s updated demand forecast graphs are among the first that show a negative Chinese trend after 2030 (in line with the model presented on this site). Knowing that a large part of current big projects in iron ore and coal are planned to build capacity for more than 20 years these long-term prospects slowly start to make their way into investment decision-making.

©2012 | Wilfred Visser | thebusinessofmining.com

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Exchange rates weigh on Rio Tinto profits

August 12, 2011 Comments off

“Rio Tinto’s iron-ore-driven profits set company records for the interim period but shares fell for a fourth day as investors’ flight from equities hits resources stocks hardest.

Tom Albanese, chief executive of the mining company, commented on the widening gap between miners’ rising earnings momentum and falling share prices. ‘There is a distorted set of economic drivers associated with the current uncertainties with respect to us and the European debt markets,’ he told the Financial Times. ‘You have an exaggerated diversion of ‘risk on’ to ‘risk off’ trades. It is difficult to come to any conclusions, but this is a backdrop that could persist for some time.’

… sector-wide pressures of rising costs and adverse exchange rates weighed on Rio’s profitability, contributing to earnings that missed consensus expectations. Higher costs for energy, materials and equipment lowered Rio’s underlying earnings by $479m, and exchange rates between the weak US dollar and strong Australian and Canadian dollars – currencies in which it incurs costs – reduced them by a further $810m in the first half.”

Source: Financial Times, August 4 2011

Observations:

  • Total increase of earnings because of price increases ($5bln) was offset by almost $3bln lower earnings because of volumes, costs and exchange rates.
  • Just as Anglo American, the company gives a detailed explanation of the rising costs, providing rare details on the waiting times for various types of equipment (see outlook – page 8). The outlook shows the average delivery time for equipment currently is approx. 6-9 months higher than average.
  • The impact of lost volumes because of weather impact (hurricanes & floods) in the first half of the year, often mentioned as important driver of prices, is only $245mln.

Implications:

  • Rio Tinto does not appear to be concerned with the current importance of iron ore as the driver of earnings. The company regards construction industry growth in China the most important metric for the economic outlook and mentions expansion of production capacity of Western Australian iron ore mines as key development priority. The company joins competitor Vale in this single-minded focus, while BHP Billiton appears to be more committed to diversify, as signalled by its acquisitions in the shale gas industry.
  • The presented $26bln capex package does not yet include projects in advanced feasibility stage such as Simandou (iron ore in Guinea). The relatively conservative dividend and buy-back program does leave room for very aggressive development spending and helps the company to keep a very low gearing. So far all major miners choose to keep the gearing low despite their positive commodities market forecasts.

©2011 | Wilfred Visser | thebusinessofmining.com

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