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Big Mining in Big Trouble

By James West 

www.MidasLetter.com

Thursday, December 11, 2008

Major mining companies’ takeover party of the last few years is starting to yield a globalized hangover of epic scope. Many of the world’s top producers of primary materials have found that the belle of the ball they danced with and wed in better times has turned into a debt anchor chained to their balance sheets.


Rio Tinto Chart
Rio Tinto (NYSE:RTP) announced yesterday that it would shed 14,000 jobs worldwide in an effort to reduce its debt load by US$10 billion by the end of next year. If successful, the company will still owe $28.9 billion. The bulk of this liability stems from Rio’s acquisition in 2007 of Canadian aluminum giant Alcan. The company secured a $40 billion credit facility to finance the acquisition.

According to Tom Albanese, CEO, “We will minimize our operating and capital costs to appropriately low levels until we see credible and meaningful signs of a recovery in our markets, but will retain our strategic growth options. We will expand further the scope of assets we are targeting for divestment. By taking these tough decisions now we will be well positioned when the recovery comes.

“Notwithstanding the current financial turmoil, we continue to enjoy a suite of key assets which operate in the lower half of the cost curve in their industries, and our suite of growth assets remains capable of re-activation as soon as market conditions justify.””

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Rio is in a better position than Canadian poly-metallic miner Teck Corp. (NYSE:TCK).

 
Freeport-McMoran Chart
Teck had the misfortune to acquire The Fording Canadian Coal Trust

this year when commodity prices for coal and its other primary product, zinc plummeted. Teck is also a significant miner of copper, gold and other specialty metals.

Teck is the world leader in metallurgical coal production used primarily in the production of steel, global production of steel is falling. As a result, Teck’s customers have asked that some of their contracted deliveries for coal in 2008 be deferred until market conditions improve.

As a result of reduced revenue from its coal business, and a parallel drop in zinc sales, the company was forced to sell assets, including its 60% interest in the Lobo-Marte gold project in Chile to Kinross Gold Corporation for US$40 million in cash and US$70 million in Kinross common shares. 

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Freeport-McMoran (NYSE:FCX) has responded to weak global conditions by reducing copper production and sales by 5%, or 200 million pounds for 2009 and a $1.2 billion reduction in capital expenditures. They have also elected to suspend the dividend of their common stock.


Teck Chart
Freeport-McMoran acquired Phelps Dodge in March 2007, which saw it incur more than $17.5 billion in debt, of which $10 billion has already been retired.

While these debt reducing strategies might seem sufficient now, the plain truth is that a protracted recession or depression means that revenue fall-off has a lot further to go. Each of these companies has a thresh-hold of income below which they will be forced to first sell more assets (for which there will be increasingly fewer buyers and therefore at deeper discounts) and second raise capital through the sale of equity. The only problem with that though is that if this is indeed the early stages of a depression (say, year one of four), then that’s going to be just as tough if not tougher than selling assets.

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James West 's career as a capital markets entrepreneur has spanned 20 years and included roles as CEO, Corporate Development, Investor Relations, Corporate Finance, editor, publisher, writer and public speaker. He is a regularly featured guest on (more...)
 

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Big Mining in Big Trouble