Base Metal Miners Take Extreme Measures to Bridge the Financial Abyss

By Steve Fiscor

Mining companies have been filing their first quarter reports for 2009 and the news could be viewed as encouraging, considering the financial turmoil the world has experienced. The mining business as a whole outperformed a lot of industries because in many cases they entered the recession with strong balance sheets, healthy assets, and a manageable amount of debt. When the reality of the credit crisis set in, many of the major mining houses were already acting ahead of the curve, moving quickly from a need to grow production by any means to the current vision of conserving cash and optimizing assets. As opposed to the typical peaks and valleys of the past, mining companies deferred new projects and scaled back production inline with demand. In fact, one could argue that once the markets right themselves, the base metal miners have created the potential for another sustained period of high prices.

According to the E&MJ Project Survey (See Jan. 09, p. xx), global mining investments in the hardock business break out as: copper, 29%; iron ore, 26%; gold, 14%; nickel, 13%; and other (18%). As investors flocked to gold during the financial melt down, gold prices have remained high and gold mining companies are posting great financial results. The story is far different for base metal miners. The downturn in the global steel business has been well-documented, but executives see the market regaining strength again in the next year to 18 months—lightning speed in the mining business. Copper prices dropped precipitously last year (See Latin American Mining report, p. 38), but they have already rebounded quite a bit this year.

Although they dare not dwell on the last half of 2008, many of them address the historical nature of the downturn. Speaking before shareholders, Teck’s Chairman Dr. Norman Keevil said, “The last six months have been the most difficult I’ve seen in over 40 years in the business, and doubly surprising to people after two years in which the words of conventional wisdom were ‘a new super-cycle in commodity prices,’ and a ‘world awash in liquidity.’ How quickly that changed.”

Many mining companies took on debt to acquire properties in a logical effort to diversify. Now they find themselves looking at ways to reschedule debt and selling off non-core assets during a soft market to raise cash. As an example, Teck borrowed a substantial sum to acquire Fording’s coking coal assets. So while Rio Tinto, BHP, Vale, Xstrata, and other miners saw their share prices decline as metal prices dropped, Teck, with its new debt, fell further. More recently the company sold gold assets and refinanced debt to strengthen its balance sheet.

That ability to raise cash, however, is what sets the mining industry apart from other industries. “We have acted swiftly where necessary to reduce costs and conserve cash,” said Tom Albanese, CEO Rio Tinto. “Markets remain volatile and the timing of global economic recovery uncertain.” During the first quarter, Rio Tinto announced divestments totaling $2.5 billion, including $850 million for undeveloped potash assets in Argentina and Canada, $750 million for the Corumbá iron ore operation in Brazil, $761 million for the Jacobs Ranch coal mine in the United States (see This Month in Coal, p. xx) and $125 million for the Ningxia aluminum smelter in China.

In their messages to shareholders, base metal mining executive are reporting very similar methods to bridge the gap, these include: suspending dividends, refinancing debt, reducing capital expenditures, layoffs, and selling properties. Cynthia Carroll, CEO, Anglo American, an executive that won praise for cross pollination efforts throughout the company has taken several of these aggressive initiatives, including what may be the largest layoff in the history of mining (19,000 people). “This series of measures taken over the last few months provides us with enhanced financial flexibility and we are therefore strongly positioned for the long term to deliver significant shareholder value through our existing operations and our well funded growth pipeline,” Carroll said.

The light at the end of the tunnel for many of the base metal mining companies is previously announced global financial stimuli. Providing the basic materials that society needs to improve the quality of life, the base metal miners will again reap the rewards as these packages take effect. Until that time, many of these companies will watch as profit margins grow slowly with improved metal prices. That’s another attribute that sets them apart, no matter how diminished, they have a profit margin.