MINING’S NEW GUARD FOCUSES ON RETURNS
Marius Kloppers, the departing chief executive of BHP Billiton, was an archetype of the era. Just a month after the South African chemical engineer formally took the helm of the world’s largest mining group by market capitalisation in October 2007, he launched a hostile $150bn takeover bid for rival Rio Tinto in an attempt to create the “world’s premier diversified natural resources company”
Now, the new breed of chief executives arriving at the helm of the four London-listed groups that dominate the mining industry are likely to have more modest ambitions.
Rob Clifford, mining analyst at Deutsche Bank, says the previous change of guard in the mining industry, between 2006 and 2007, heralded a significant period of M&A in the sector.
Those were the years of Mr Kloppers’ most audacious bids, which included not only the $150bn futile swoop for Rio but an unsuccessful $40bn hostile takeover of PotashCorp of Canada and another deal with Rio – a merger of their respective iron ore businesses in Western Australia – that was also ditched.
In contrast, Mr Clifford says the current change of guard heralds “an era of much more stringent capital management, and a focus on shareholder returns”.
This focus on returns, already visible in the miners’ most recent announcements, matters well beyond the mining industry itself: less investment would, over time, reduce supply growth and lead to higher commodity prices. It also concerns the minerals-rich countries, from Chile and Mongolia to Canada and Australia, which earn a significant proportion of their income from mining tax and royalties.
The latest leadership change is the arrival of Andrew Mackenzie to replace Mr Kloppers at BHP Billiton. The appointment follows the departure of Cynthia Carroll and the arrival of Mark Cutifani at Anglo American and the exit of Tom Albanese and the appointment of Sam Walsh at Rio Tinto. Moreover, Ivan Glasenberg will replace Mick Davis this year after the takeover of Xstrata by Glencore concludes.
The shift to a more defensive attitude is partly imposed by circumstances. Whether they are new or incumbent chief executives, shareholders are demanding restraint in capital spending amid big budget overruns and lower commodities prices. Moreover, the previous M&A and mega-project binge has proved ill-timed as economic growth in China slowed, bringing down commodities prices and forcing miners to take multibillion writedowns in projects from Brazil to Canada.
So far this year, Anglo American, BHP Billiton and Rio Tinto have announced $22.1bn in impairments. Over the previous five years, they took more than $30bn in total. Gavin Wood, mining analyst at Edison, says: “The end of the era was signalled by all of the impairment charges.”
The new mining chief executives are busy trying to reassure shareholders that they will now bring a different business style, avoiding the mistakes of the past decade. Sam Walsh, the incoming chief executive of Rio Tinto, summarised the fresh attitude in his first conference call with investors, talking about the need for “greater accountability and responsibility”.
“We must treat the company’s money like it is our own and act like owners of our businesses not managers,” the Australian executive said.
Mr Mackenzie, only hours after being promoted, spoke about the need of a “more laser-like focus” on driving down costs and driving up capital efficiency.
The fresh pitch is music to the ears of some of the largest institutional investors in the sector, which have become increasingly frustrated with the strategy of some big miners.
Evy Hambro, head of natural resources at giant BlackRock – and one of the most influential voices in the industry – late last year told miners they must “become pickier about their investments”.
The next two to three years could see mining companies continue delaying big and costly mega-projects, such as BHP Billiton’s Australian Olympic Dam copper and uranium mine or Vale’s projected Simandou iron ore mine in Guinea. In addition, the new bosses have indicated they will sell assets and focus on cost-cutting.
However, those expecting the next five years to be a quiet period for the industry may be mistaken. Jake Greenberg, a mining specialist at Jefferies, says that Glencore-Xstrata could take the opposite direction and embark into mega-deals.
“With Anglo, Rio and now BHP all replacing their chief executives for making large, value-destructive acquisitions, Ivan Glasenberg will likely have the field to himself when he looks to buy high quality, cash generative mining assets.”
Additional reporting by Neil Hume in Sydney and Christopher Thompson in London
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