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Posts Tagged ‘weather’

Mining Week 03/’12: Record setting iron ore miners & dividend increase

January 22, 2012 1 comment

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 increases dividend

    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

  • Mining Week 02/’12: Temporary & Permanent Cost Increases

    January 14, 2012 Comments off

    Top Stories of the Week:

    • ENRC settles Congo dispute with First Quantum
      • ENRC agreed to pay $1.25bln to First Quantum to settle the dispute over the Kolwezi Tailings project, the Frontier and Lonshi mines and related exploration interests in DRC. First Quantum was stripped of the rights to these projects by the government, after which ENRC came in and agreed to buy the rights from the government in a move widely criticized in the industry.
      • Sources: ENRC press release; Financial Times; First Quantum press release
    • Coal India agrees to salary costs hike of 25%
      • Coal India, by far the largest miner of energy coal in the country, has agree to a 25% permanent increase of wages. In august of last year the unions demanded a 100% increase to offset increased cost of living and reduce the increasing income gap between management and workers. Investment bankers at the time expected the company to agree to a 15-20% increase. The salary hike results in an increase of operating cost for the company by approx. 10%.
      • Sources: Wall Street Journal; Economic Times
    • Weather in Australia and Brazil drives iron ore price up

      • The closure of the export facilities in Port Hedland because of cyclone Heidi and the cancellation of shipments from Brazil because of heavy rains results in supply pressure in the iron ore market. Heavy rains are expected to continue in the Pilbara region, which supplies close to 40% of seaborne iron ore in the world, in the short term.
      • Sources: Financial Times; Supply Chain Review; Wall Street Journal; Vale Press Release

    Trends & Implications:

    • Extreme weather conditions have a big influence on bulk material supply chains in the short term, because stockpiling these materials in amounts large enough to last for several weeks is very costly and thus not a normal practice. Especially the steel industry is hit hard with both iron ore and metallurgical coal having to be shipped in from locations that are often hit by storms. Although the impact on spot prices in the short term can be large, the longer term impact on the miners is quite small. Most contracts allow for some flexibility in when exactly the ore is delivered. As long as the mining operations don’t have to stop, the ore will get to the steel manufacturers as some point.
    • The wage increase expected for Coal India is a good example of the very high cost inflation of mining in developing countries. Whereas the cost increase of contracted services and equipment leasing can be seen as (at least partly) a temporary phenomenon caused by high commodity prices, the cost increase because of increased labor and consumable costs in developing countries causes a more permanent shift of the global cost curves.

    ©2012 | Wilfred Visser | thebusinessofmining.com

    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