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COLUMN-Will the Big 3 iron ore miners have enough time to win price war? – by Clyde Russell (Reuters India – September 24, 2014)

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LAUNCESTON, Australia, Sept 24 (Reuters) – The recent debate over iron ore has tended to be whether the three mining giants who dominate seaborne supply will win their massive bet that they can drive high-cost producers out of the market.

But a more relevant question is whether they will have the time to achieve their aims. The Anglo-Australian pair of Rio Tinto and BHP Billiton, as well as Brazil’s Vale have flooded the market with their low-cost iron ore, with supply from Western Australia ramping up dramatically in the past year.

This has led to a collapse in the Asian spot price .IO62-CNI=SI to a five-year low of $79.40 a tonne on Tuesday, down 41 percent from the end of last year and 58 percent from the record $191.90 a tonne reached in February 2011.

The main question for the big three is not whether they can drive higher-cost competitors to the wall, but how long their own investors will tolerate the lower earnings as a result of the weak iron ore price.

While the chief executives of the big three haven’t exactly said so in public, they are clearly hoping for a relatively short war and a quick victory, after which iron ore prices will once again rise and stabilise at a higher level. Again, that price level hasn’t been clearly spelt out, but I would imagine the big three have a number in mind somewhere above $90 a tonne, with $110 likely viewed as a ceiling.

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UPDATE 2-Workers to strike at Chile’s Escondida copper mine next week – union (Reuters U.K. – September 16, 2014)

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(Reuters) – The union at the world’s largest copper mine, Chile’s Escondida, has called a strike for Sept. 22 and 24, aiming to paralyze activity to win improved working conditions, the union said on Monday.

In a surprise announcement on Monday evening, the Sindicato No. 1 union said it would call on its 2,800 members to stage two 24-hour strikes at the mine, which is controlled by global miner BHP Billiton Plc .

The union, which represents the vast majority of workers at the mine, said the stoppage would affect mining and port operations. Escondida, in northern Chile’s copper belt, produced 1.19 million tonnes of copper last year, about 20 percent of the output from Chile, the world’s top copper producer.

The union carried out a similar 24-hour stoppage over pay and conditions last year, without causing any long-term impact on copper production. However, it stunned the copper market in 2011 by staging a two-week strike that sent the mine’s output tumbling.

Escondida “systematically infringed on labor norms,” the union said in a statement on Monday, citing overtime, holidays, hygiene and safety issues. It said on its blog that it held a series of meetings with company representatives on Thursday.

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Iron ore giants eating little guys now, but cannibalism looms – by Clyde Russell (Reuters U.S. – September 3, 2014)

http://www.reuters.com/

Clyde Russell is a Reuters columnist. The views expressed are his own.

LAUNCESTON, Australia – (Reuters) – There was maybe more than a touch of hubris in Rio Tinto boss Sam Walsh’s recent comment that it’s time for other iron ore producers to “really feel the consequences” of the current low price.

The chief executive of the world’s No.2 iron ore miner was speaking after his company’s first-half results last month, basically delivering the message that Rio Tinto is going to keep going full-steam ahead on its iron ore expansion plans.

Walsh, along with the bosses of top iron ore miner Vale and No.3 BHP Billiton, is betting that their low-cost, high volume model will force smaller competitors to the wall, leaving them the undisputed kings.

Perhaps he should have a word or two with the chief executives of coal miners, which, oddly enough, includes himself given Rio Tinto’s extensive coal assets.

When the price of both thermal and coking coal started to decline in mid-2011, the word from the industry was that this wasn’t too big a surprise, but no need to worry as Chinese demand will ensure prices don’t fall too far, and all the new capacity brought on and planned will be profitable.

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BHP Billiton set to expand Pilbara iron ore operations – by Matt Chambers (The Australian – August 25, 2014)

http://www.theaustralian.com.au/business

BHP Billiton chief executive ­Andrew Mackenzie says iron ore prices are unlikely to climb back above $US100 a tonne but the company is readying to spend an extra $US3.25 billion ($3.5bn) to bring more ore on to the market in a bigger-than-expected expansion of its West Australian mines.

As iron ore prices last week slid to about $US90 a tonne and approached five-year lows, Mr Mackenzie said he was not counting on a price floor forming.

At the same time, in a declaration largely lost amid BHP’s plans for a $US14bn spin-out of non-core assets, the world’s biggest miner says it is looking to expand its Pilbara iron ore mines and ports to annual capacity of 290 million tonnes a year.

This is up from a previous target to grow to 270 million tonnes and at a forecast capital cost that is dramatically lower than guidance given to analysts a year ago.

“We would say it is quite unlikely that we would see prices north of $US100 a tonne, so our forecasts are obviously based on something below that,” Mr Mackenzie told British media when asked if there might be a price floor around current price levels.

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Nickel region on edge as BHP looks for exit – by Paul Garvey (The Australian – August 23, 2014)

http://www.theaustralian.com.au/business

AS a lifelong resident of the Kambalda region, shire president Mal Cullen has watched the fortunes of the town wax and wane in line with the price of the nickel that has been pulled out of the ground there for almost 50 years.

The residents of Kambalda, in Western Australia’s Goldfields, have become accustomed to the volatility of the nickel price and the impact it can have on their lives. But just as the nickel price appeared to be starting to emerge from years in the doldrums, BHP’s decision to get rid of its assets in the region has brought a new level of uncertainty to the town.

BHP surprised the market when it opted to exclude its Nickel West division from the spin-off it announced this week, with BHP chief executive Andrew Mackenzie instead saying the group would push ahead with a long-running trade sale that is yet to flush out a deal. The assets were deemed to be too mature and too marginal to be lumbered into the spin-off. The failure to find a new owner so far, coupled with their exclusion from the spin-off, leaves the assets looking like the orphan that nobody wants.

For the people of Kambalda and the smaller nickel miners that feed ore into the Nickel West concentrator and smelter, the idea the operations could be shut down ­altogether is difficult to comprehend.

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Ex BHP chairman says cycles move and he’s a happy shareholder – by Simon Evans (Sydney Morning Herald – August 21, 2014)

http://www.smh.com.au/

Former BHP chairman Jerry Ellis, who led the miner during one of its darkest periods in the late 1990s before it pursued a merger with South Africa’s Billiton, says the company is performing well and maintains the 2001 merger was a good move.

Mr Ellis says BHP needed its cash flows strengthened at the time, but the situation had now changed and the “cycle has moved on”.

He was chairman of BHP from 1997 to 1999 after joinng the board in 1991. He was also a former boss of the BHP ¬Minerals division and an active promoter of a decision by BHP to pay $3.2 billion for Magma Copper in the United States in 1996.

It ultimately proved to be a disastrous purchase when copper prices slumped dramatically and heavy writedowns were needed. Many analysts blame that acquisition for weakening the company to a point where it needed to pursue a merger.

“I’m a shareholder and very pleased with the way the company is travelling,’’ he said on Wednesday. BHP Billiton on Tuesday officially confirmed a $14 billion demerger plan where it is spinning off many of the assets Billiton brought to the table in the 2001 merger.

“I think [former chairman]Don Argus summed it up very well. At the time BHP needed the cash flow from the Billiton assets,’’ Mr Ellis said.

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RPT-COLUMN-Reliance on cost-cutting the real BHP story – by Clyde Russell (Reuters India – August 20, 2014)

http://in.reuters.com/

Clyde Russell is a Reuters columnist. The views expressed are his own.

LAUNCESTON, Australia, Aug 20 (Reuters) – BHP Billiton’s plans to spin-off unwanted assets may have received a tepid welcome from investors, but the real news from the mining giant’s results is the limits to cost-cutting.

Delving into BHP’s results presentation on Tuesday shows the company has been successful in cutting expenses, with a 12 percent cut in cash costs at the flagship Western Australian iron ore operations, while the Queensland coal business recorded a 24 percent drop.

BHP said its productivity-led volume and cost efficiencies were $2.9 billion in the year to end June 2014, beating its target by $1.1 billion. Given the company’s net income for the period was $13.4 billion, the $2.9 billion in savings represents about 22 percent of the profit, which certainly looks impressive.

The problem comes when you start to look at the savings achieved, the potential for further cost-cutting and the likely trajectory of commodity prices.

BHP said it produced a record 225 million tonnes of iron ore in the 2014 financial year, which resulted in revenue of just under $23 billion, or roughly 34 percent of the group’s total revenue.

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Diversified mining giants becoming less so – by Lawrence Williams (Mineweb.com – August 19, 2014)

http://www.mineweb.com/

Confirmation that BHP Billiton is planning to demerge what it considers its non-core assets into a new company continues the trend for the world’s biggest miners to simplify their structures.

LONDON (MINEWEB) – The big post 2008 fallout in the global mining sector has been a major influence on corporate policy since. It has already seen the culling of the chief executives who had the misfortune to be in place as metal prices slumped and profits collapsed. They had previously been exhorted by their institutional shareholders to go for growth almost at any cost.

But once it became apparent that some of the huge capital programmes involved were actually having a negative impact on the bottom line, helped by the fact that the concentration on growth had led to management’s eyes being taken off controlling costs at existing operations, then institutional pressures changed and heads started to roll. CEOs became an endangered species

Now it looks as though there is something of a different tack coming into play. For the single commodity players – e.g. those in the precious metals sector there has also been a move to demerge, or just sell what are considered to be non-core assets – those that had appeared to be taking up too much management time and effort, but without complementary returns. A typical example of this has been Barrick Gold’s floating off of African Barrick which now at least seems to be turning itself around, but still probably falls short of its parent’s return requirements. Others have been divesting of so-called non-core projects piecemeal.

But while the gold miners were relatively quick to act – the big diversified miners perhaps took a little more time over their moves to do likewise.

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UPDATE 4-BHP announces spin-off plan, no share buyback for now – by Sonali Paul and Silvia Antonioli (Reuters India – August 19, 2014)

http://in.reuters.com/

MELBOURNE/LONDON, Aug 19 (Reuters) – The world’s biggest mining company, BHP Billiton , announced plans to spin off businesses worth an estimated $16 billion, most of them acquired in a 2001 merger, to focus on its most profitable activities.

But it held off on a share buyback, disappointing investors who had hoped to receive around $5 billion. BHP’s London-listed shares fell 4.5 percent on Tuesday.

Chief Executive Andrew Mackenzie said the widely expected move to simplify BHP around the “four pillars” of iron ore, copper, coal and petroleum – with potash as a potential fifth pillar – would spur cashflow growth and boost returns.

These assets generated 96 percent of the group’s underlying core profit in the 2014 financial year.

“A demerger is a logical next step for other high quality assets also in our portfolio that don’t have a scale of those in our major business,” Mackenzie said in a call with investors.

The spin-off company, dubbed NewCo for now, will bundle BHP’s aluminium, manganese, Cerro Matoso nickel in Colombia, South African energy coal, some Australian metallurgical coal assets and the Cannington silver, lead and zinc mine. It will not include Nickel West in Australia, for which a separate sale process was continuing, Mackenzie said.

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Rio and BHP tighten grip on world iron ore – by John Addis (Sydney Morning Herald – August 18, 2014)

http://www.smh.com.au/

Mexican drug cartels have been diversifying into the iron ore business, smuggling ore worth about $US1 billion a year into China. But it’s the emergence of a more legitimate cartel – one run largely by Australians – that should worry China more.

Rio’s latest result shows how powerful the big three global producers have become. The company’s results for the six months to June 30, with underlying earnings rising 21 per cent to $US5.1 billion ($5.47 billion), are remarkable given that iron ore prices actually fell 20 per cent over the period.

After slashing costs, capital expenditure and debt, management hinted at higher dividends and more buybacks. If the mining boom is supposed to be over, no one told Rio Tinto.

The really interesting element to the result concerned production increases. Although lower iron ore and coal prices stripped $US1.4 billion from underlying earnings, volume increases, particularly in iron ore, offset that fall by more than $US900 million. All up, iron ore contributed more than 90 per cent of total profit.

With China slowing and the country’s government frantically shifting spending away from capital expenditure towards consumption, which dampens demand for ore, Rio Tinto and BHP are expanding output.

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COLUMN-BHP Billiton demerger shows how good a deal Billiton got – by Clyde Russell (Reuters U.K. – August 18, 2014)

http://uk.reuters.com/

Clyde Russell is a Reuters columnist. The views expressed are his own.

LAUNCESTON, Australia, Aug 18 (Reuters) – BHP Billiton’s plan to demerge its unwanted aluminium, nickel and manganese assets underscores just what a fantastic deal shareholders in the old Billiton got when the two joined in 2001.

When Australia-based BHP joined forces with the London-listed, but largely South African, Billiton, a diversified natural resources giant was created.

At the time it was largely viewed as a deal that favoured Billiton shareholders. BHP shareholders got about 58 percent of the merged entity, while Billiton’s got 42 percent, meaning that BHP paid about a 20 percent premium to Billiton shareholders, according to a March 19, 2001 report in the Wall Street Journal.

With the Aug. 15 news that BHP Billiton’s board favours a demerger, the 2001 deal comes full circle. While it’s unlikely to be an exact match, the bulk of assets proposed for the new spin-off company will be those that Billiton brought into the 2001 merger.

Billiton’s main assets in the 2001 merger were the Hillside and Bayside aluminium smelters in Richards Bay on South Africa’s east coast, the Mozal smelter in neighbouring Mozambique, and energy coal mines in South Africa.

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UPDATE 5-BHP Billiton set to spin off unwanted assets – by Sonali Paul and Silvia Antonioli (Reuters U.K. – August 15, 2014)

http://uk.reuters.com/

MELBOURNE/LONDON, Aug 15 (Reuters) – Diversified mining company BHP Billiton declared its preference for a demerger of its aluminium, manganese and nickel assets on Friday, setting the stage for the formation of a separate business that could be worth at least $12 billion.

BHP said its board was considering a spin-off at meetings ahead of its annual results announcement next week. An Australian newspaper said those plans were well advanced and would include the Nickel West business that the world’s biggest miner has been trying to sell.

“A demerger of a selection of assets is our preferred option,” the company, which has a market capitalisation of $185 billion, said in a statement to the Australian stock exchange. BHP has long aimed to sell or spin off its manganese, aluminium and nickel assets, which contribute little to its earnings. Simplifying the company would “generate stronger growth in cash flow and a superior return on investment”, it said on Friday.

Some of the largest shareholders in BHP welcomed the announcement. “It’s good to see BHP taking the lead in the sector on this. It reassures you as a shareholder. It makes me more willing to have it as a significant bet within my fund,” said Christopher Moore, portfolio manager of Fidelity Global Industrials Fund.

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BHP Billiton’s thirst triggers an outback water fight – by Sarah Martin (The Australian – August 9, 2014)

http://www.theaustralian.com.au/

SHANE Oldfield kicks the red rocks on his vast, dry pastoral lease north of Marree where he raises organic Angus beef for ­export.

The outback Clayton Station in northern South Australia has always been marginal farming land. With an average of 10cm of rain a year the property is dependent on water from the Great ­Artesian Basin in dry years.

“We are living in a desert, and without the basin we are non-existent,” Mr Oldfield says. “We haven’t had a decent rainfall since February 2012, so without the Great Artesian Basin we wouldn’t be here.”

But while accustomed to battling drought, the Oldfields now have another fight on their hands. The water level of the basin is dropping dramatically, raising fears that the pastoral land will become unviable.

The culprit, they say, is BHP Billiton, which pumps all of its water from the basin to its Olympic Dam mine and the Roxby Downs township 250km away. “BHP aren’t going to own up to the fact that they are sucking the guts out of the basin,’’ he tells The Weekend Australian.

“But they are. They want the water from this country because without the water they can’t mine, and the GAB water is the cheapest water they are ever going to get.”

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COLUMN-Big 3 iron ore miners in volume, price sweet spot – by Clyde Russell (Reuters India – July 28, 2014)

http://in.reuters.com/

LAUNCESTON, Australia, July 28 (Reuters) – One thing has become clear from the latest production reports from the big three iron ore miners: They appear intent on ensuring their dominance by boosting low-cost output.

BHP Billiton mined a record 225 million tonnes of the steelmaking ingredient in the year to end-June, beating its own forecast by 4 percent. BHP said in its latest production report that it expects to increase output further, to 245 million tonnes in the 2014-15 financial year.

Fellow Anglo-Australian miner Rio Tinto boosted output 23 percent in the second quarter from the same period last year to 75.7 million tonnes. It also is forecasting higher annual output, with the quarterly report released on July 16 pointing to 2014 production of 295 million tonnes, up 11 percent from 266 million in 2013.

The world’s biggest iron ore miner, Brazil’s Vale , also had record output in the second quarter, posting a 12.6 percent gain to 79.45 million tonnes. The company is planning to boost its annual output to 450 million tonnes by 2018 from 306 million last year.

The three global iron ore giants have effectively gambled that they can continue to boost production and grab bigger slices of global demand, given that they can withstand lower prices due to their low-cost mines and economies of scale.

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Life reflected in BHP’s figures – by Terry McCrann (The Australian – July 26, 2014)

http://www.theaustralian.com.au/business

BHP Billiton’s production figures effectively fired the starter’s gun for the annual profit season. They also neatly captured in microcosm the big questions about the future course of the overall economy.

Indeed, they were a much better guide to the future and its uncertainties than the June quarter CPI figures, released on the same day, which sent sections of the economentariat into a frenzy of hyperventilating certainty.

That’s a certainty that will no doubt last until some other statistic sends them hyperventilating in the opposite direction.

There’s no great surprise in the significance of BHPB’s numbers — oh for the day when it returns to the simplified BHP, sloughing off the second “B” along with all the rubbish it bought with Billiton.

BHPB remains our biggest company by far. While it won’t generate a profit this year all-but equal to the profits of all the four big banks combined, as it did a few years ago, it will still post a 2013-14 profit which will put any individual bank profit in the shade.

BHPB is not just the resources boom in miniature, it all but is the resources boom. OK, perhaps in combination with Rio Tinto, given the latter’s edge in iron ore, the resource that really “is” the boom, both in terms of dollars generated and its dominant centrality in our role in the China story.

Then perhaps we should add Twiggy Forrest’s Fortescue as not just the third iron ore major but also more directly representative of the “boom” aspect of the “resources boom”.

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