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Mining writedowns near $50 billion
January 30, 2013

In the past year, the largest mining companies in the world have erased about $50 billion off project valuations and it seems there could be more coming, Bloomberg reported.

Anglo American, Vale and Rio Tinto Group led the writedowns as declining metal prices, rising project costs and slowing demand forced reviews. Glencore International may write down some nickel and copper assets acquired through its takeover of Xstrata, Liberum Capital has said. BHP Billiton may trim aluminum operation valuations, according to Goldman Sachs Group and Sanford C. Bernstein

Executives and shareholders are paying the price for a $1.1 trillion mergers and acquisitions binge over a decade. Failed deals in aluminum and coal caused $14 billion in writedowns at Rio Tinto and cost Chief Executive Officer Tom Albanese his job this month. Cost overruns contributed to Cynthia Carroll’s departure as CEO of Anglo American, which slashed $4 billion off the value of its Minas- Rio iron-ore project in Brazil.

Anglo American fell 20 percent in London trading last year, while Glencore slipped 10 percent. BHP gained 13 percent and Rio Tinto 12 percent. Earnings from Melbourne-based BHP are due Feb. 20, while Glencore’s 2012 financials are expected March 5.

Contributing to the woes are higher costs for energy, labor and construction.

Glencore may write down as much as $2 billion following its $37 billion takeover of Xstrata Plc, due to be completed in March, according to Richard Knights, an analyst at Liberum said.

BHP, the world’s biggest mining company, may lower the valuation of its nickel and aluminum assets by about $5 billion, Bernstein said in a report, while Goldman Sachs said in January that BHP may take a $2 billion to $3 billion impairment on aluminum. BHP in August announced a $3.3 billion charge on gas and nickel assets.

“It’s a hangover effect from the metals and mining euphoria we’ve had in the past 5 to 10 years,” Jeff Largey, a London-based analyst at Macquarie Group Ltd., said in an interview. “Decisions made are now coming home to roost.”

Natural resources companies went on a deal spree in the past decade, spending $1.1 trillion chasing growth, according to data compiled by Bloomberg. Merger and acquisition activity peaked in 2006 when mining and metal businesses spent more than $200 billion.

Anglo American said its Minas-Rio project, which has been dogged by delays and budget overruns, will now cost $8.8 billion to develop, up from $2.6 billion when Anglo bought it in 2008. Anglo’s biggest shareholder, South Africa’s Public Investment Corp., said in October that Carroll made poor decisions on how to spend cash.

Even gold has been affected. Kinross Gold Corp.’s CEO Tye Burt was fired after he presided over a $2.49 billion writedown on the Tasiast mine in Mauritania, an asset Kinross acquired as part of its C$8 billion ($8 billion) purchase of Red Back Mining Inc. Newmont Mining Corp. took a $1.61 billion writedown on its Hope Bay project in Canada, while Barrick Gold Corp. CEO Aaron Regent left in June against a backdrop of cost overruns.
 

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