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The Year’s Top Priorities for Mining CEOs

December 31, 2012 Comments off

With rapidly increasing production costs, metal and coal prices stable or decreasing, and general global market uncertainty, 2012 was not an easy year to be the CEO of a mining company. The boards of many mining companies have drawn their conclusions and decided 2013 will be the year in which a new leader will make a start. These new executives and the veterans that survived 2012 will face many similar challenges in the new year. The market for project development appears to cool down, but cost pressures and decreasing margins are real and volatility is here to stay for some time.

Below 7 key priorities for mining CEOs in the coming year:

1. Watch your balance sheet

Global debt problems aren’t over yet, and a company’s debt is never stronger than the host country’s sovereign debt. A lot of national, regional, and corporate debt is still overvalued. The European financial system being too young to make tough decisions, the American political system being to antique and entangled in corporate interests to make tough decisions, and a new Chinese government being too dependent on international markets and national stability to make tough decisions are not going to help to solve the debt issue anytime soon. A new chapter of the debt crisis is likely start in 2013, creating a volatile environment in which prudent balance sheet management is key for business stability, preventing you from finding yourself standing at the edge of a solvency cliff, as many coal miners and even iron ore miner Fortescue experienced recently. Don’t get deep into debt, and don’t wait ‘till the last moment to refinance maturing debt, as many global developments could make raising money in debt markets suddenly very hard.

2. Kill bad projects

As a result of rapidly increasing product prices and in the knowledge that global demand for most commodities continues to grow over the next 2 decades, the project pipelines across the industry have been filled to the max. However, for most products only about one third of the projects currently being communicated as ‘planned’ is actually needed to bridge the supply-demand gap in the 2025. That means two out of three projects need to be stopped. And yes, that includes some of your projects. Deciding which of the development projects in the global industry actually are the good projects, and which not so good projects do have a chance to succeed simply because they have a powerful developer, is going to be a key task for this year. Simply doing an IRR calculation based on an imaginary product price doesn’t do the trick; there might be plenty of better projects out there that will make your price forecasts miss the mark completely. It’s time to rev up the intelligence on competitor’s projects: in the end the best projects survive. Making sure you get hold of your fair share of good projects is the objective for the coming years. Those projects that don’t pass the test and that happen to be yours? Kill them, and move on to priority number 3.

3. Expedite good projects

Hopefully your assessment of global project potential confirms your view that some of the projects in your pipeline will make the cut. Now do everything you can to bring those projects forward. Counter-cyclical investment has been a mantra of management gurus forever, but very few executives actually dare to execute on it. Redirect the resources you free up by killing bad projects – finances, human capital, and equipment – to those projects that might succeed. This does not only help you to bring those projects forward, it also sends a clear signal to the market that those projects really are the probable survivors of the battle of the fittest projects. If you decided that none of your projects are good enough to make it? Get to work on priority number 4.

4. Buy cheap future growth

Many of the important mines of the end of this decade and of the coming decades are still in the hands of explorers or juniors that don’t have the funds or appetite to develop the projects, that are always on the outlook for the acquirer, and that have seen their share price become much more discounted than the prices of their potential acquirers. Buying current production is expensive as always and will be tough on your balance sheet, but this year is not a bad moment to buy the exploration-stage projects that will make your company great in the long run. Be aware that for many of these projects the development capital, that scares most company executives at this point, will actually only be needed during the next commodity price cycle. And yes, those projects are challenged geographically, politically, technically, and environmentally, but so were most of the current great mines 10 years before they started producing.

5. Be tough on suppliers and contractors

The slump for mining suppliers and contractors lags the slump for miners by about a year. Last year was the moment of the great awakening in mining companies that the period of rapid growth is over; this year their suppliers and contractors will feel the pain. Don’t forget to squeeze your suppliers out this year! With many projects being shelved or stopped the bargaining position of engineering and construction constructors and equipment manufacturers is deteriorating quickly. Over the past years they have enjoyed a situation in which there were simply not enough skilled people and production capacity to serve all of the industry’s wants straight away, but that period is about to be over. Cost pressures are still there, but the mining companies can solve part of that issue by paying less in new procurement and trying to renegotiate existing contracts.

6. Get talent on board when the job market is down

The suddenly emerging reality of thinning margins has made most mining companies very hesitant in recruiting, and has led several companies to reduce the size of the workforce or implement hiring freezes. The job market in the industry does not look good, so people stay where they are. Just as you should be searching for the right projects especially during tough times, you should be on the hunt for ambitious talent when the job market is bad. Good people always want to make the next step, and any period in which making steps is hard is a headhunter’s bonanza. Not only half of Xstrata’s executives is seriously looking for a new challenge away from Glenstrata, but junior, mid-management, and executives in paralyzed companies around the world are sensitive to a good offer at this time.

7. Prepare for the low/now growth era

Most of the young talent you recruit at this point will witness the age of ‘peak mining’ during their career. Riding the wave of development in emerging countries the mining industry’s output will grow over the next decades. Still, driven by demographics, economics, and increasing recycled metal supply, the demand for most mined metals is likely to start a slow decrease around 2040. Your investors don’t really care about anything that happens after 2020, but the talent you are recruiting and the communities you are operating in do care. Rio Tinto’s ‘Mine of the Future’ program is focused entirely on the technological future of mining. However, preparing your company for a new, low or no growth, normal implies exploring a whole new way of doing business, technology only being a minor part. Wouldn’t it be great to be known as the CEO who prepared the company for ‘Mining of the Future’?

Enough to work on to keep the miner’s job interesting in the new year! Do you happen not to be the CEO of your company? Don’t hesitate to forward this text to him/her to make sure the most important to-do list in the company includes these priorities. Happy new year!

2012 | Wilfred Visser | thebusinessofmining.com

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Mining Weekly 51/’12: Freeport, Xstrata, & Bumi

December 16, 2012 Comments off

Top Stories of December:

  • Freeport diversifies further into oil & gas
    • Copper miner Freeport McMoran surprised the market by acquiring two American oil & gas companies for approx. $9bn, taking on a lot of target debt to make a total deal size of approx. $20bn, the second largest acquisition in the industry this year.
    • Freeport did not request shareholder approval for the diversifying acquisitions, leaving a large part of the shareholder base unhappy with the deal and the stock price dropping approx. 15%.
    • Sources: Freeport presentation; Wall Street Journal; Financial Times
  • Xstrata puts Tampakan project on hold
    • Xstrata’s $5.9bn Tampakan copper project in the Philippines is put on hold while waiting for government approvals: the federal government doesn’t want to give the go ahead before the mining law is reformed, and the local government is opposing the issuance of an environmental permit based on a ban on open pit mining.
    • Sources: Reuters; Sagittarius / Xstrata
  • Bumi, Bakrie, and Rotschild continue their fight
    • The board of Bumi plc has indicated that it favors the Bakrie offer to buy out the assets of the Indonesian coal producer over Rothschilds offer to increase the stake in those assets. Bakrie’s offer implies that the shared ownership of assets by Bumi and Bakrie comes to an end.
    • The board also indicated that it does not intend to sell the stakes in Berau to Bakrie, which would mean the company does not completely revert to a cash shell.
    • Sources: Financial Times 1, 2; Jakarta Post

Trends & Implications:

  • Deloitte published its annual report with the top trends in the mining industry for the coming year: on top of the list is the continued high cost of doing business, which is forcing many companies to reconsider development projects (see Tampakan above). The full list of trends is:
      Deloitte - tracking the trends 2013

    • Counting the costs: Paying the price of bullish behavior
    • Managing demand uncertainty: Conflicting market indicators magnify volatility
    • Capital project deceleration: Quality trumps quantity in the project pipeline
    • Preparing for the M&A storm: Market indicators point to rising deal volumes
    • Governments eye the mining prize: Resource nationalism remains
    • Combating corruption: Miners are being held to higher standards
    • Climbing the social ladder: A new level of responsible behavior
    • Plugging the talent gap: Skills shortages still loom
    • Playing it safe: Using analytics to generate insights and improve safety outcomes
    • At the IT edge: Getting the most out of emerging – and existing – technologies
  • Xstrata’s decision to put the Tampakan project, one of the largest development projects in the copper industry, on hold fits two trends: the increasing importance of alignment with both federal and local governments in developing countries, especially around when governments and legislature are changing; and the hesitance to undertake any large investments in a time of rising costs and uncertainty around demand growth.

2012 | Wilfred Visser | thebusinessofmining.com

Check my latest column in the free online journal The International Resource Journal on the importance of iron ore derivatives.

Mining Week 47/’12: BHP sells diamonds; Anglo pays for iron ore

November 18, 2012 Comments off

Top Stories of the Week:

  • Harry Winston buys BHP’s diamond business for $500m
    • Diamond retailer Harry Winston has decided to buy BHP Billiton’s diamond business for $500m cash. The business consists of 80% of the EKATI diamond mine in Northern Canada and sorting and marketing units.
    • Both BHP Billiton and Rio Tinto put their diamond businesses up for sale this year. Rio Tinto might be reconsidering that decision as it couldn’t secure a good price for its Diavik mine and its Indian holdings have come back with good exploration results.
    • Sources: BHP Billiton press release; Harry Winston press release; Financial Times
  • Anglo’s Minas Rio iron ore project delayed and more expensive
    • Anglo American announced that Minas Rio, its 26.5Mtpa iron ore project in Brazil, will not start producing before the second half of 2014. The delay is caused by license issues around construction of power transmission lines.
    • Anglo also announced that the total capital cost for the project is “unlikely to be less that $8.0bn”, making this the first major iron ore project which costs more than $300 per millions tonnes capacity.
    • Sources: Anglo American press release; Reuters; mining.com
  • Qatar’s support appears to seal GlenStrata deal
    • The Qatar Sovereign wealth fund has announced it will support Glencore’s offer of 3.2 shares per share for Xstrata, making it very likely that the largest mining deal of the past years will become reality. Xstrata’s shareholders get to vote on Tuesday.
    • Qatar, Xstrata’s 2nd largest shareholder after Glencore, also announced it will abstain from voting on the retention incentive package for Xstrata top management, making it very likely that this >$200m retention package will not become reality.
    • Sources: Qatar holding; Financial Times 1; Financial Times 2

Trends & Implications:

  • Anglo’s issues in Brazil demonstrate the enormous importance of getting power issues for large projects sorted out early. Last month Rio Tinto’s enormous Oyu Tolgoi project in Mongolia was only hinging on a power supply agreement with the Mongolian and Chinese governments. Many projects in developing countries either need to secure power supply from other countries or have to build their own power plants, forcing them to go through tremendous licensing issues and import natural resources to get their operations powered up.
  • When the Xstrata retention package is voted down, a big group of top-level executives at Xstrata can be expected to start looking for new jobs quickly, opening up a great pool of talent for other companies. The corporate cultures at Xstrata and Glencore are so different that many miners will have to adjust to the more aggressive, top-down culture of the trading house. Many of the top managers will prefer to find a good job in another mining house instead.

2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 46/’12: Lonmin vs. Xstrata & the CEO-carousel

November 10, 2012 Comments off

Top Stories of the Week:

  • Lonmin raises equity to stay independent
    • Lonmin announced a $800m rights offering, in that way fending of the proposal by Xstrata to increase its stake in the troubled platinum miner to a majority share.
    • The strikes in South Africa, which escalated at Lonmin’s operations, have caused significant lost production and urgent financial issues for Lonmin.
    • Sources: Lonmin press release; Financial Times; Wall Street Journal
  • BHP starts search for new CEO
    • BHP Billiton has started the search for the successor of CEO Marius Kloppers. Apparently the company will not necessarily promote an insider to the top position.
    • With Mick Davis leaving Xstrata if/when the merger with Glencore is approved and Cynthia Carroll leaving AngloAmerican next year, 3 of the top CEOs in the mining industry will change.
    • Sources: Financial Times 1; The Economist; Financial Times 2
  • India limits export of iron ore
    • Iron ore exports from the Indian state of Orissa will be limited strongly by new production quota for mines without processing facilities.
    • The government is trying to attract processing investment to prevent iron ore is only exported without significant benefit for the country. High export duties (raised to 30% early this year) and production quota are used to discourage exports from the world’s 3rd largest iron ore exporter.
    • Sources: Wall Street Journal; Commodity Online; Steel Orbis

Trends & Implications:

  • Orissa’s attempts to curb exports don’t do much to stimulate local investment in processing capacity. India’s government announced a year ago that it would make it more attractive for companies to invest by setting up mining right and process plant permitting packages. With the current uncertainty about both global demand and India’s local demand outlook it is unlikely that large investments in additional processing capacity will be made in Orissa in the near future. As a result the will mainly slow down the local economy.
  • Almost a year ago, after the announcement of Ferreira as new CEO of Vale, this blog conducted a poll among its readers to find out which top company CEO was mostly to be replaced first. The results showed most trust in the future of Kloppers at BHP. A year later 3 out of 4 are on their way out, while most CFOs have been replaced over the past 2 years too. The high level of activity in replacing top executives indicates a change of mindset in the boards of these companies: shifting from a focus on growth and investment to a focus on operational excellence and payout. The new group of top executives will mainly need to show a track record of cost-control and willingness to make tough decisions on closure of mines.

Results of Dec-2011 Poll on thebusinessofmining.com

2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 42/’12: South Africa strikes; Glenstrate voting scheme

October 8, 2012 Comments off

Top Stories of the Week:

  • South African strikes spread; workers fired
    • Illegal (wildcat) strikes in South Africa have spread to more or less all major miners in the country. Anglo American’s Kumba iron ore and platinum operations are faced with production disruptions, as are Xstrata, GoldFields, Anglogold, and most other major mining houses in the country.
    • South African strikes escalated when police shot down Lonmin strikers. After Lonmin agreed to a 22% wage increase workers in other companies demanded similar increases, bypassing the traditional unions. Several companies are trying to set up structured wage discussions to come to a collective agreement.
    • AngloAmerican’s Amplats decided to fire 12 thousand striking workers, which is a fifth of its total workforce.
    • Sources: Anglo American press releases1 2; Financial Times 2; wall Street Journal
  • Xstrata board recommends Glenstrata deal and complicates voting
    • Xstrata’s board of directors issues advice for the company shareholders to accept the merger proposal to form Glenstrata. The voting structure has been set up to assess support for a deal both with and without an extensive retention package for Xstrata’s top management.
    • Shareholders will vote first on the merger proposal both including and excluding the retention package, requiring a 75% majority excluding Glencore’s votes. Then the vote on the retention package will be done separately, requiring only a 50% majority of votes.
    • Sources: BusinessWeek; Financial Times

Trends & Implications:

  • The voting scheme is set up by Xstrata’s board to have a safety net for the deal in case the shareholders don’t accept the management retention package. The Qatari sovereign wealth fund is the largest shareholder that can vote on the merger deal; it has not voiced its opinion on the improved Glencore offer and on the management incentives, but insiders indicate the group considers retention of Xstrata’s officers a key priority. Key unknown in the voting mechanism is whether or not the results of the first two questions (on the merger) are made public before the 3rd vote on the retention scheme.
  • The unrest in South Africa is much wider than the mining industry, and as such requires solutions that are much broader than the industry. In the short term a large part of the workers might return to work with a significant increase in wages as demonstrated in the Lonmin case. However, as long as this increase does not span across the industry the workers that have not been given a raise will turn to strikes to stress their demands. The mining houses will have to work nationwide to find a sustainable solution for the industry, which is hard because South African miners operate on the high end of the global cost structure for many commodities. The task is even harder when taking in account that social unrest will continue as long as the issues in related and supplying industries continue.

2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 39/’12: Fortescue moves on; GlenStrata almost there

September 22, 2012 Comments off

Top Stories of the Week:

  • Xstrata’s board votes October 1st on Glencore offer
    • The decision by Xstrata’s board on whether or not to endorse Glencore’s new bid for the company is delayed by a week to October 1st. The endorsement might help to convince a majority of shareholders to accept the offer for 3.05 shares of Glencore per share of Xstrata.
    • The debate around generous retention packages for Xstrata’s key managers started again as several large shareholders voiced their discontent. Glencore stressed nothing will change to those packages unless Xstrata’s board wants to adjust them. Finding a compromise to satisfy the key shareholders might be the final step for the board to make the deal happen.
    • Sources: Wall Street Journal; Financial Times 1; Financial Times 2
  • Fortescue solves debt problems by refinancing $4.5b debt
    • Fortescue announced refinancing of $4.5bn debt with Credit Suisse and JP Morgan as underwriters. Debt maturity of the new deal is 5 years. The company was facing liquidity problems as low iron ore prices and aggressive investment schedules were undermining its ability to repay debt.
    • Sources: Wall Street Journal; Fortescue announcement

    Fortescue’s debt profile prior to refinancing

  • Oyu Tolgoi waiting for power
    • Rio Tinto’s Oyu Tolgoi mine is 97% complete, but negotiations with Mongolian and Chinese governments on power supply delay startup. Oyu Tolgoi built 220Kvolt power line to connect to the Chinese grid, but can’t sign a offtake agreement without consent of the Mongolian government
    • Sources: Financial Times; The Australian; Project website

Trends & Implications:

  • Oyu Tolgoi’s trouble to get powered is just one example of the challenges many large operations face to secure affordable power supply. The power requirements of a large operation require a significant change and development of power grids of many developing nations. Generation capacity is typically not readily available and the large offtake trigger discussions about long term price agreements.
  • After meeting with Glencore’s board this week, Xstrata’s board appears to be working hard to make the merger/acquisition go ahead. It is hard to imagine another outcome in which Xstrata’s shareholders get more value for their company, making it likely they will accept the offer. If the deal is approved by Xstrata’s shareholders, the changes in holdings various large investors will likely make will give an interesting insight into the clientele effect the integration of a mining house and a commodity trader could have.

2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 38/’12: Fortescue in debt trouble; South African shutdowns

September 16, 2012 Comments off

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

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