Mega miners cut costs, sell assets to placate yield-hungry investors | South China Morning Post
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Mega miners cut costs, sell assets to placate yield-hungry investors

Miners slash costs, dump assets and slow new projects after moderating Chinese demand triggered US$33 billion in writedowns over the past year and sparked management sweep-outs

PUBLISHED : Thursday, 25 July, 2013, 3:11pm
UPDATED : Thursday, 25 July, 2013, 3:11pm

The threat of oversupply, cooling demand growth and stalled asset sales will cast a cloud over earnings for the world’s largest miners, with all except BHP Billiton set to report big profit drops for the six months to June.

But there is a silver lining.

The currencies of resource-producing nations like Australia and South Africa have weakened and labour shortages have abated as projects get shelved, easing the cost inflation that has plagued the industry.

“Commodity prices are of course the most important driver of earnings and cash flow. But maybe the market has been unequivocally focused on prices and less focused on things that might be going in the right direction - like costs, capital expenditure,” said Jefferies analyst Chris LaFemina.

For years, miners had splurged on projects and acquisitions to meet soaring orders from China. They are now slashing costs, dumping assets and slowing new projects to appease investors after moderating Chinese demand triggered US$33 billion in writedowns in the past year and sparked management sweep-outs.

“Hopefully that flows into higher operating and free cash flows, and hopefully that translates into higher dividend payouts,” said Brenton Saunders, an investment analyst at BT Investment Management, which owns BHP and Rio Tinto shares.

“But I’m not sure that’s going to happen in the short term. Maybe that’s next year’s story.”

The main factor that will determine whether the June half marks the bottom for earnings is China. If the world’s second-biggest economy manages to sustain growth of more than 7 per cent, metals prices would see some support.

The dire outlook for commodity prices has weighed heavily on the big five miners’ shares, with London-listed miners dropping by a fifth since the start of the year against a 13 per cent rise for the broader FTSE 350 index.

Of the big five, Rio Tinto, Brazil’s Vale, Glencore Xstrata and Anglo American are expected to report sharp drops in profit. They have been slammed by weaker copper, iron ore and coal prices as they struggle to sell off assets.

The standout is BHP Billiton, which has lifted copper, coal and iron ore output despite falling prices, and is reaping the benefits of a controversial push into shale in the United States, producing more oil and gas as prices rise.

Anglo American, the first to report, is likely to join the austerity drive when its new chief executive Mark Cutifani unveils his strategy with the company’s results on Friday.

But some investors fear the big miners may pull the reins too tightly in favour of boosting payouts to shareholders, limiting investment in future earnings growth.

“I’m not keen to see these companies change strategy to a point where their business models are unsustainable over the medium term, and I think that’s the danger at the moment,” said Tim Schroeders, a portfolio manager at Pengana Capital.

Anglo American (July 26)

Anglo, the smallest of the big five, is expected to report a more than 16 per cent drop in underlying operating profit to US$3.12 billion, with earnings per share tipped to fall almost a third to US$0.93, according to forecasts provided by the company.

The focus will not be on earnings but on the results of Cutifani’s review of the business and any hint of a plan to redress its underperforming shares, including potential solutions to long-standing problems like South African platinum and Brazilian iron ore.

Vale (Aug 7)

Rio de Janeiro-based Vale is expected to report a 30 per cent drop in second-quarter profit to US$1.85 billion from a year earlier, its eighth consecutive quarterly profit fall, according to the average preliminary estimates of seven analysts surveyed by Reuters.

Most of the decline is due to a 12 per cent drop in average iron ore prices <.IO62-CNI=SI> and a 38 per cent decline in nickel prices, more than offsetting increases in volumes shipped by the world’s No.1 iron ore miner and No.2 nickel producer.

Its shares have been the worst performer among the big five, down 27 per cent this year, despite a rally from nearly four-year lows in July.

Rio Tinto (Aug 8)

Rio is expected to report an 18 per cent drop in first-half profit to US$4.21 billion, according to Thomson Reuters I/B/E/S.

Investors are eagerly awaiting a progress report on the No.2 iron ore miner’s moves to cut US$5 billion in costs and efforts to sell a raft of assets, including its Northparkes copper mine, a minority stake in Coal & Allied in Australia, and its controlling stake in Iron Ore Company of Canada.

But they may be disappointed on the asset auctions. Chief Executive Sam Walsh has already taken Rio’s diamonds business off the auction block for lack of bidders, and bidding for its 80 per cent stake in the Northparkes mine have come down to just one bidder, OZ Minerals.

Rio’s iron ore expansion to 360 million tonnes a year in Australia is also under scrutiny, with some analysts predicting it will stagger the expansion out to 2019, four years later than planned, to cut spending and shore up iron ore prices.

BHP Billiton (Aug 20)

BHP, the world’s biggest miner, is tipped to report an 8.7 per cent rise in second-half profit to US$7.8 billion, according to Thomson Reuters I/B/E/S.

Besides watching out for progress on cost-cutting, investors are eager to hear new CEO Andrew Mackenzie’s thinking on the company’s growth pipeline, after it put more than US$40 billion worth of projects on ice a year ago.

The one project that is seen potentially moving forward this financial year is the 8 million tonnes a year Jansen potash mine in Canada, which would be the world’s biggest potash mine.

“If they went for a smaller scale, get it up and running and then scale it up when markets can satiate the demand for it, that may be a more appropriate strategy,” said Pengana’s Schroeders.

Glencore Xstrata (Aug 20)

Commodities trader and miner Glencore is reporting its first set of earnings since it completed the takeover of Xstrata.

It has not published proforma numbers, meaning there are no consensus numbers for the group for comparison. Analysts, though, expect a dip in headline profit on weaker coal, nickel and zinc prices. It could also book writedowns after the Xstrata deal.

The focus, however, is likely to be less on earnings and more on hints as to the outcome of Glencore’s 100-day review after the Xstrata deal - even though the full results of that analysis will not be presented until Sept. 10.

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