Are oil companies learning from mining mistakes?
Since the beginning of 2011, some of the world’s largest mining companies have lost a third to nearly 90% of their market value as global demand for their products declined. In the same period, some of the world’s largest privately held oil companies have posted gains ranging from 17% to 26%.
If we had stopped the oil chart on July 24, oil company share price gains would have swelled to 40-66%.
At no time since 2011 did the mining companies fall as far or as fast as oil companies have in the past four months.
Since early 2011, the price of iron ore pellets has dropped from $220 per metric ton to less than $120, the same price as in 2009. That price swing has cost Vale S.A., BHP Billiton and Rio Tinto share price declines of 77%, 45% and 36%, respectively.
Consulting firm PricewaterhouseCoopers had said that to keep up with demand, the top 40 [mining companies] announced more than $300 bln of capital programmes with over $120 bln planned for 2011, more than double the total 2010 spend.
Three firms - Vale, BHP and Rio - accounted for 50% of the total market cap and total assets for the top 40 firms amounted to nearly $1 trln.
Mergers and acquisitions in the mining sector were just beginning to heat up, culminating in the February 2012 $41 bln acquisition of Xstrata by Glencore. And then the music stopped. Growth in emerging markets slowed sharply and mining companies, as the industry had done in the past, had already committed to large projects that took billions to develop and years to bring to completion. By early 2013, mining company mergers and acquisitions over the past ten years had totalled more than $1 trln.
Write-downs taken in 2012 had cost shareholders about $50 bln in value and they revolted.
Rio Tinto wrote down $14 bln assets in 2013 and the CEO was fired. Gold miner Anglo American wrote down $4 bln and fired its CEO. BHP Billiton wrote down $3.3 bln in August 2012 on natural gas and aluminium projects, and Vale took a $4.2 bln charge in 2012. The oil and gas business is doing all it can to avoid overstretching. Since late July, the share price for Exxon Mobil has dropped 11%, while Chevron and Royal Dutch Shell have both lost 20%. BP is down 23%. The suddenness and degree of the crude price decline and the collapse of stock prices happened far more quickly than the decline in mining, but the oil companies appear to have learned some things from the mining disasters: don’t wait too long to cut costs; don’t wait too long to shed assets; don’t make shareholders (and boards) mad; and, don’t expect miracles.