By Chris Berry (@cberry1)
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It’s interesting to note that on the same day the International Monetary Fund released their annual World Economic Outlook which lowered expectations for global growth in 2015 to 3.8% from 4%, that several potentially large mining deals were either launched or mooted.
While the talk of the potential deal for a merger between Glencore (GLEN:LN) and Rio Tinto (RIO:LN, RIO:NYSE) dominated the headlines, two (relatively) smaller deals were also announced.
Anglo American (AAL:LN) will reportedly commence with a sale of up to $1 billion worth of copper assets in Chile including the Mantos Blancos and Mantoverde mines, along with AAL’s 50.1 percent stakes in the El Soldado mine and Chagres smelter according to Bloomberg. These assets are small relative to others in AAL’s portfolio, but a willingness to part with them says a great deal about the company’s thoughts on the need to generate returns in the current macroeconomic environment.
With approximately 69 assets in the company portfolio and 31 delivering just 2% of EBITDA, it’s not hard to argue that AAL has overextended itself.
EBITDA serves as a prime measure of operational performance. Therefore, one can see why AAL is intent on shrinking its asset base to improve its balance sheet – low yielding properties act as a drag on company performance. This decision to consolidate should help the company in an era of reduced returns and should be applauded.
Source: Financial Times
Second, Lundin Mining (LUN:TSX, LUNMF:OTCBB) agreed to purchase Freeport McMoRan’s (FCX: NYSE) 80% ownership in the Candelaria copper mine and its Ojos del Salado operation in Chile for $1.8 billion. This deal is seemingly predicated upon FCX’s desire to decrease its gigantic debt load, as high as $20 billion, down to a paltry $12 billion by 2016.
These deals are a sign of the slow and continuous change now engulfing the mining industry. It would appear that the relentless fall in most commodity prices finally has the attention of the entire industry and CEOs are intent on fixing bloated balance sheets and positioning for any positive macroeconomic momentum. I continue to maintain that the mining industry has reached a cyclical bottom (based on metals prices), but that doesn’t mean returns will increase without cost controls in place.
Shown below are the prices of gold (in white), silver (in orange), iron ore (in yellow), and copper (in green) between 2010 and 2014. It would appear that prices have done a “round tripper” while costs have surely risen. Yes, it’s true that these commodity prices are high on a historical basis, but most of the mining companies have demonstrated an inability to take advantage of this and produce returns which beat their benchmarks.
Source: Bloomberg
Takeaways
I mentioned above that the IMF released its World Economic Outlook and has downgraded growth expectations based on Japan, the Euro Zone, and most Emerging Markets slowing while the pace of growth in the United States is generally positive, but questionable as Quantitative Easing is set to end. This tightening of monetary conditions may be occurring at just the wrong time.
The good news is that the global economy is growing – just unevenly. Because of this, my preference for lowest cost producers remains with a bias towards the Energy Metals. Demand for most of these metals is growing much faster than global GDP and this offers a cushion against sluggish overall growth (although this thesis offers a higher risk profile). It would appear that there is more “blood in the streets” to come as a frothy equity market meets a slowing growth profile as we head into earnings season.
I’ll be elaborating on this topic next week in Hong Kong at the 121 Mining Investment Conference on October 15th and 16th. If you are in Hong Kong and would like to attend or would like to meet after the conference, please let me know. Hope to see you there!
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