Mining Companies Are Back in the Black
Coming out of a punishing downturn, executives are still cautious despite the return to profitability
The world’s biggest miners are profit machines again, cashing in on soaring commodity prices and rewarding investors who stuck with them through a brutal downturn.
BHP Billiton Ltd., the world’s largest miner by market value, said Tuesday it had a profit of $3.2 billion for the second half of 2016 after posting a $5.7 billion loss in the year-earlier period. Anglo American PLC, the fifth-largest mining company, reported a profit of $1.6 billion for all of 2016, a dramatic rebound from 2015, when it lost $5.6 billion.
The solid performance builds on strong results from British-Australian miner Rio Tinto PLC, which two weeks ago said it earned $4.6 billion in 2016 following a loss of $866 million in the prior year. Switzerland-based Glencore PLC is scheduled to release 2016 results on Thursday, with analysts widely predicting a return to profit.
The swift return to profitability for the world’s mining giants has surprised analysts, investors and executives alike. Few had predicted sustained rallies in everything from iron ore to coal to copper last year.
Global mining companies are in better shape now than they were two years ago, when a steep decline in commodity prices sent their shares reeling, analysts say. To bolster their health, they sold off underperforming mines, shrank workforces and paid down massive piles of debt.
Glencore scrambled to sell $4.7 billion in assets in the past year, including an Australian rail business and a 49.9% stake in its agriculture business. The company raised $1.4 billion from selling future deliveries of gold and silver from a pair of mines in Peru.
The sales, along with eliminating its dividend and issuing new stock, helped Glencore survive a scary dive in its share price as investors rebelled over its debt levels. The company has said its net debt would fall to $17.5 billion or less by the end of 2016, from $29.7 billion as of June 30, 2015.
Anglo American last April agreed to sell its Brazilian niobium and phosphates business to China Molybdenum Co. for $1.5 billion—part of a downsizing plan the company described as “radical.” The miner had expected to unload more operations, but a rebound in coal and iron-ore prices made it more attractive to keep those assets.
Anglo American also benefited from solid sales of diamonds from its De Beers Group business, which was boosted by U.S. demand. The U.K.-based firm cut its net debt to $8.5 billion at the end of 2016 from $12.9 billion a year earlier.
BHP’s net debt at year-end stood at $20.1 billion, down from $26.1 billion at midyear. Rio Tinto last year slashed net debt by 30% from the previous year to less than $10 billion.
“They’re as lean as can be,” said Campbell Parry, an analyst with Abax Investments, referring to the mining companies. The Cape Town, South Africa, investment firm owns shares of Anglo American and BHP.
Leaner balance sheets should give the companies “a lot more agility than they had a few years ago,” Mr. Parry said.
Rising copper prices have helped the miners. Glencore, Anglo American, BHP and Rio are among the world’s biggest producers of the metal, whose price rose 27% in 2016. Copper has continued rising in 2017; it is up nearly 10% as work stoppages in Chile and permit disputes in Indonesia contribute to supply concerns.
Now that the miners have dug themselves out of a hole, the question is whether they can keep from sliding back in, analysts say. Mining executives, burned by the downturn, remain cautious.
They have chosen to use the surge in profits largely to reward investors, not launch big new projects. Rio increased its dividend and announced a $500 million share buyback. BHP doubled its dividend. Anglo says it plans to pay dividends on 2017 profits after eliminating its dividend last year.
Although profits are back, they remain far below the dizzying heights reached in years like 2011, when BHP recorded over $23 billion in profit amid a China-fueled boom in commodity prices.
Mining executives are particularly wary that coal and iron-ore prices, which surged last year amid renewed demand in China and reduced Chinese production, have risen too far too fast.
“I have to say, we don’t think these prices will hold up in the long term,” Anglo American Chief Executive Mark Cutifani said on a conference call with reporters Tuesday, referring to coal and iron ore.
BHP CEO Andrew Mackenzie, in comments to reporters in London Tuesday, said reduced stimulus in China and new supplies will likely hurt prices for bulk commodities.
But Mr. Mackenzie said he remains confident that, overall, demand from China will remain solid this year. “I think China is steady as she goes,” he said.
Executives are also growing concerned that an increasingly unpredictable political situation in the U.S. and elsewhere could spark trade disputes, disrupting global growth and demand for commodities.
BHP executives have singled out the policy platform of President Donald Trump’s administration, which they said could spark trade wars that weigh on business confidence, hurt investment and lead to higher inflation in the U.S. Mr. Cutifani has also cautioned Mr. Trump against pushing the world toward protectionism.
“It’s an uncertain world out there,” Mr. Mackenzie said. “Trade wars are not going to help anybody.”
White House deputy press secretary Lindsay Walters said Mr. Trump’s “policies will ultimately prioritize the best interests of the American people and American workers.”
Other mining executives have expressed enthusiasm about Mr. Trump’s plans to ramp up infrastructure spending in the U.S. Glencore CEO Ivan Glasenberg believes that a $1 trillion infrastructure program floated by Mr. Trump is likely to boost demand for the commodities his firm produces, especially copper.
Mr. Mackenzie and BHP Chairman Jac Nasser met with Mr. Trump, then president-elect, in January. At the meeting, they discussed the impact the U.S. policy direction could have on resources markets, Mr. Mackenzie said Tuesday.
Notable post-earnings movers
- Post-earnings gainers: LNTH +7%, DEPO +4.6%, TEX +2.7%,HCLP +2.6%, XPO +2.3%, FSLR +1.5%
- Post-earnings losers: FUEL -13.7%, SREV -12.9%, TXRH -6.6%, ENTL -2.8%, NYMT -2.3%, WLL -2.3%
Newmont Mining misses by $0.06, beats on revs; reaffirms gold production outlook, lowers FY17 capex guidance (37.44 +0.43)
- Reports Q4 (Dec) earnings of $0.25 per share, excluding non-recurring items, $0.06 worse than the Capital IQ Consensus of $0.31; revenues rose 23.2% year/year to $1.79 bln vs the $1.75 bln Capital IQ Consensus.
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Outlook:
- Investments to explore and develop promising expansions and to address previously announced geotechnical issues at Carlin and changes to cost allocation between gold and copper are expected to slightly increase the co's 2017 and 2018 gold cost outlook. Economic assumptions include $1,200 per ounce gold, $2.25 per pound copper, $55 per barrel WTI and $0.75 AUD-USD exchange rate.
- Gold: Attributable gold production outlook is in line with previously published five-year guidance and expected to increase to between 4.9 and 5.4 million ounces in 2017 as full year production at Merian and Long Canyon more than offsets declines at Twin Creeks and Yanacocha. Longer-term production of between 4.5 and 5.0 million ounces is expected with production from Long Canyon and Ahafo partly offsetting declines at maturing assets. Expansion projects at Ahafo, Yanacocha and Twin Creeks represent upside to both production and cost guidance.
- CAS is expected to be between $700 and $750 per ounce in 2017 and between $700 and $800 per ounce in 2018, before any portfolio improvements. Co expects longer term CAS to improve to $650 and $750 per oz. AISC is expected to be between $940 and $1,000 per ounce in 2017 and between $950 and $1,050 per ounce in 2018, excluding further cost and efficiency improvements expected through the Company's ongoing Full Potential program.
- Capex: Total capital is expected to be between $800 and $900 million in 2017, covering the remaining capital for Northwest Exodus and the Tanami Expansion Project. 2017 sustaining capital outlook of between $600 and $700 million represents a 24 percent reduction from previously published guidance due to cost savings and deferrals.
- Copper: Boddington and Phoenix are expected to produce between 40,000 and 60,000 tonnes of copper per year in line with previous guidance excluding Batu Hijau. In 2017, copper costs are expected to be between $1.45 and $1.65 per pound CAS and between $1.85 and $2.05 per pound AISC. Longer term, copper CAS is expected to average between $1.50 and $1.90 per pound and AISC is expected to average between $1.85 and $2.15 per pound, well below previous guidance due to a shift in allocation of costs between copper and gold.
Unilever/Kraft Heinz takeover obstacles too numerous to surmount - MergerMArket
Kraft Heinz’s [NASDAQ:KHC] fruitless offer to Unilever [LON:ULVR, AMS:UNA] last Friday (17 February) faced a litany of obstacles from the start, sector bankers told this news service.
The USD 49.61-per-share (GBP 40.09) offer was fair following Kraft Heinz's initial approach in recent weeks, a source familiar with the situation said. Despite discussions between the parties, the price announced on Friday was ultimately determined by Kraft Heinz alone, a second source familiar said. Kraft Heinz’s price was likely flexible, one of the sector bankers said.
Kraft Heinz walked away from the proposed acquisition on Sunday (19 February). Unilever did not feel USD 49.61 per share was high enough for a meaningful adjustment of the cash (USD 30.23 per share) or equity (USD 19.38 per share), it is understood.
The equity component was valued higher after the offer was announced as Kraft Heinz's stock price moved up, boosting the total premium from 18% to 25%, the first source noted.
Unilever’s other concerns included the two companies’ contrasting corporate cultures and Kraft Heinz’s cost-averse business approach, which would have run against Unilever’s focus on investment for the top line, it is understood.
Kraft Heinz could have had deep cuts in store for Unilever, this news service reported. Not every division of Unilever presented the same opportunities for cost savings, as its foods would have meshed better with Kraft Heinz’s portfolio than its non-food brands, a second sector banker said. Unilever’s food division constituted 23.8% of 2016 revenues.
This margin-enhancing strategy — as practiced by Kraft Heinz minority owner 3G Capital — can be a dangerous long-run proposition, the second banker said. A target company has its costs run down for three or four years, sees little investment in research and brand development, and winds up a husk, he said. Its owners are likely to have realised impressive margins along the way, but risk low growth in the long run, he said.
The deal also faced a potential obstacle in Unilever’s shareholder structure that gave its two constituent Netherlands and UK listings separate investor bases, potentially increasing the number of shareholders and regulatory regimes that could weigh in on the deal.
By UK takeover law, Kraft Heinz cannot approach Unilever for another six months unless another company makes an offer to Unilever in the meantime.
Kraft Heinz did not respond to request for comment and Unilever declined to comment.
Closing Market Summary: Another Record Close on TuesdayLast week's bullish sentiment carried over into the first session of the new week as investors decidedly pushed the stock market to new record highs on Tuesday. The S&P 500 (+0.6%) and the Dow (+0.6%) led the advance with the Nasdaq (+0.5%) closing just a step behind.
Equity indices came out of the gate strong this morning, rallying on an uptick in crude oil and the highest eurozone composite PMI reading in nearly six years. But the stock market hit a speed bump in front of the 12:00 pm ET speech from Philadelphia Fed President Patrick Harker who is a voter on this year's FOMC. The speech turned out to be a non-event as Mr. Harker didn't provide any new information, reiterating his belief that three rate hikes are appropriate for 2017.
After trending sideways in the wake of Mr. Harker's comments, the major averages regained their momentum late in the afternoon session to hit fresh session highs going into the close.
The lightly-weighted real estate sector (+1.3%) led the afternoon advance, stealing the top spot on the day's leaderboard from the energy space (+0.7%). The energy group's performance depended upon crude oil, which stunted the sector's advance after slipping from its session high. The energy component still closed with a solid gain, up 1.1% at $54.37/bbl, as strong OPEC supply cut compliance overshadowed record high U.S. inventories.
Consumer staples (+1.0%) finished just behind the real estate sector following Wal-Mart's (WMT 71.45, +2.08) upbeat earnings report. WMT shares jumped 3.0% after the company reported better than expected earnings per share and raised its dividend.
On the consumer discretionary (+0.6%) side, Home Depot (HD 145.02, +2.02) also had a solid showing after beating top and bottom line estimates. In addition, HD increased its quarterly dividend and authorized a $15.0 billion share repurchase program.
The remaining sectors finished in the green, posting gains between 0.4% (materials) and 1.1% (utilities). Health care's (+0.5%) advance was particularly notable given the underperformance in biotech names that sent the iShares Nasdaq Biotechnology ETF (IBB 293.04, -1.27) lower by 0.4%.
The Treasury market began Tuesday with a sizable loss, but dovish comments from Minneapolis Fed President Neel Kashkari (FOMC voter) brought Treasuries back to their flat lines. In the morning session, Mr. Kashkari stated that the U.S. labor market has "more room to run," suggesting that he believes there is no hurry for the Fed to raise rates.
The benchmark 10-yr yield finished the day one basis point higher at 2.43% after showing a four basis point gain earlier in the session.
Investors did not receive any notable economic data on Tuesday.
Wednesday will see several economic reports, including the MBA Mortgage Application Index at 7:00 am ET, January Existing Home Sales (consensus 5.57 million) at 10:00 am ET, and FOMC Minutes at 2:00 pm ET.
- Nasdaq Composite +9.0% YTD
- S&P 500 +5.7% YTD
- Dow Jones Industrial Average +5.0% YTD
- Russell 2000 +3.9% YTD
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Deutsche Wohnen ordinary shares, all primary, offered through accelerated bookbuilding managed by Deutsche Bank, Goldman, UBS as joint global coordinators and joint bookrunners and Exane BNP Paribas as joint bookrunner, terms show.
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