[miningmx.com] – THE long-standing adage about mining is that it consists of a hole in the ground with a fool at the bottom and a liar at the top. As derogatory as that may sound to an industry where its top 40 largest companies turn over $731bn, and provide the minerals crucial to modern life, the loss of investor confidence in the sector since 2012 suggests many among the investment ranks were prepared to believe it.
Mining companies spent $348bn between 2005 and 2012, but generated only $126bn in net cash returns. It was a poor performance that was reflected in how resource equities fared. The HSBC Global Mining index shed 46% of its value from 2011 to 2013 as the reality of how little had been returned in yield by the big-spending mining companies hit home.
That’s why at a market capitalisation of $157bn, Facebook is worth nearly double Rio Tinto ($86bn) even though the Anglo-Australian miner generated $50bn from continuing operations during its 2013 financial year.
In comparison, the social media phenomenon generated $2.5bn in the first quarter of this year and some $641m in profit whereas Rio Tinto produced an annual loss of $3bn, including impairments and currency exchange losses.
The market forces that affect Facebook and Rio Tinto are, of course, vastly different, but the fact remains that in a universe of investment, the promises of riches that would flow from China’s industrialisation in the early 2000s had, in the hands of the diversified mining companies, resulted in very little.
Glencore CEO, Ivan Glasenberg laid into mining companies saying they had “really screwed up” by focusing on unstinting growth, often in expensive and long-dated greenfields projects, when modular brownfields expansions may have been a better option.
In May, Oleg Deripaska, the billionaire owner of Russian aluminium producer, United Co. Rusal, was prepared to tell Bloomberg News that the age of the huge diversified miners that could afford to lose billions of dollars was over.
Investors sought focused businesses with rational output. “They were buying different assets without proper thinking,” Deripaska said. “I think that those $100bn companies are in the past,” he said.
Certainly, the CEOs that led them fell away. BHP Billiton, Anglo American and Rio Tinto all parted with their ‘growth’ CEOs in favour of predominantly older bosses. The age of the austerity CEO was here of which Rio Tinto’s Sam Walsh is perhaps the most outspoken proponent.
Walsh announced plans to halve Rio Tinto’s capital spending to $8bn by the group’s 2015 financial year. Exploration was also halved, and operating costs reduced by $2bn resulting in the loss of 4,000 jobs.
In February, Andrew Mackenzie, CEO of BHP Billiton, said at the mining firm’s interim results presentation that the company would spend ‘only’ $16bn on projects in its 2014 financial year, down from $22bn a year earlier. On an annualised basis, cost-cutting and efficiency gains had totalled $4.9bn and were expected to rise to $5.5bn.
Mark Cutifani, Anglo American’s CEO since April 2013, said in an interview with Bloomberg News, that Anglo ought to be doing better than the 15% return on capital employed he had at first set as an acceptable return target.
“A company like ours should be delivering 20% return on capital through the cycle. We haven’t put a time on that, but we believe 20% is doable,” he said. Interestingly, of the 69 assets owned by Anglo American, 31 were delivering only 2% of earnings before interest and taxes – a performance that prompted Cutifani to say: “We told them if you can’t deliver, you won’t survive in the portfolio”.
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