Mining companies could follow Rio Tinto's troubles

January 22, 2013

Underperforming assests and low commodity prices led Rio Tinto to take a $14 billion writedown (ME, Jan. 17) and other major mining companies may soon follow suit.

Mining firms including BHP Billiton and Anglo American are likely to follow Rio Tinto’s lead in writing down underperforming assets by as much as $10 billion, as low prices and rising costs eat into valuations, Reuters reported.

Rio Tinto has been hit the hardest by low commodity prices and acquisitions that have failed to pan out. The company’s total writedowns in the past six years exceeds $34 billion, according to Reuters. Attention has now turned to its rivals, who may also be forced to take pain when they release earnings in the coming weeks, due to a combination of weak commodities prices and poor capital allocation decisions.

Aluminum is in focus. Brazil's Vale said last month it would take a $1.3 billion charge on its 22 percent stake in Norwegian aluminum group Norsk Hydro.

Analysts expect BHP to write down the book value of its aluminium assets by $2 to $3 billion. Some believe BHP may try to sell the business.

Hobbled by over capacity and strong supply growth, aluminum is trading at its lowest price since November. Even if prices recover modestly this year to around $2,200/t from a current $2,046/t, as forecast by BNP Paribas analyst Steve Briggs, it will hardly be sufficient to revive the business.

BHP could also take a hit in nickel.

Last year, BHP took a $450 million writedown on the value of its Australian nickel business, dwarfed at the time by a $2.8 billion writedown on its U.S. shale gas assets.

BHP is not expected to impair its shale business further, but its nickel woes are not over.

Unsold London Metal Exchange-held nickel stocks continue to rise and now stand at a 33-month high of 148 kt - more than one tenth of yearly global consumption.

Vale has said it will take a fourth-quarter $2.85 billion pre-tax writedown on its Brazilian nickel project Onca Puma, and investors are asking about the future of its $7 billion Goro nickel project in New Caledonia.

Anglo American, meanwhile, is expected to take the opportunity to clear up at or before full year results next month, the last under outgoing chief executive Cynthia Carroll.

The group's platinum arm has already announced a planned 6.6 billion rand ($740 million) writedown. That could increase as the overhaul of loss-making Anglo American Platinum progresses, but for 2012 numbers, the pain will come from rising costs at its Minas Rio iron ore operation.
The Brazilian project, a bruising top-of-the market deal, is expected to cost over $8 billion to build - over three times original estimates, though spending is still not finalized and the date of first production is still uncertain.

That is on top of an original price tag of $4.8 billion, excluding the Amapa iron ore operation, which was part of the original deal but which Anglo has agreed to sell. So far, Anglo has spent close to $10 billion on Minas Rio - for no profit.

In a November note entitled "minus Rio", Deutsche Bank analysts estimated a writedown totalling as much as $7 billion for Minas Rio and Amapa, already written down by $1.5 billion in Anglo's 2009 numbers. Other analysts put the figure below $5 billion - the rough amount invested by Anglo so far to develop the asset - with Liberum estimating a hit of up to $3 billion.

Anglo American is struggling to contain the cost of Minas Rio - driven up by permitting and other delays -- has mandated a review. It may also consider bringing in a partner.



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