Mines must close for industry to recover
Oversupply keeps prices at low levels
FOR the world’s ailing metalsmining industry to have any hope of a turnaround, more producers may have to close.
Companies that dig up everything from gold to copper have failed to stem a prolonged collapse in mineral prices mostly because not enough mines are closing. Years of increased output have created global surpluses just as slower economic growth erodes demand. Unprofitable operations were kept alive by across-theboard cuts in operating costs, lower energy prices, a strong dollar and the unfulfilled hopes by mining executives that markets will improve.
“We are going to see bankruptcies,” Evy Hambro, who manages Blackrock’s world mining fund, said on Tuesday. “Some companies have been praying for commodity prices to deliver a kind of escape route from the problems that they face. That’s clearly gone the other way.” While nobody expects industry giants such as Rio Tinto Group or BHP Billiton to go bust, higher cost producers and those unable to raise more cash are vulnerable as a measure of base-metals prices heads for a third consecutive annual drop.
The loss of value meant more companies were closer to default, Moody’s Investors Service said on Wednesday.
There have been some production cuts, but the rout has deepened because companies are still supplying more metal than is needed globally. Most mining executives do not want to trim even unprofitable output because the resulting tighter supply and higher prices would benefit rivals.
China, the world’s biggest metals user, has been mostly to blame for the price slump. The Asian country’s economy is growing at the slowest rate in a generation, curbing demand, just as new mines are coming into operation.
“We need to see supply cuts across these markets to try to bring them back into balance,” said Colin Hamilton, the global head of commodities research at Macquarie Group in London. “It’s either companies making the decisions themselves, or it comes through a full process of people dying very slowly.”
A gauge of contracts on the London Metal Exchange has slid 26 percent this year, the most since 2008, to near the lowest in six years. About 15 percent of copper production and a quarter of zinc output are unprofitable, while 60 percent of aluminum and 70 percent of nickel are supplied at a loss, according to Standard Chartered. First-half profits slumped at least 30 percent for Rio Tinto, Glencore and Anglo American, while BHP Billiton’s full-year earnings slid 52 percent. The biggest producers have proved the most efficient at pumping out more material at lower costs, while smaller companies have struggled.
“You’ve got to allow the markets to work,” said Tom Albanese, the chief executive of Vedanta Resources. “It creates a prisoner’s dilemma in terms of what it means for the broader sector, but it’s logical and it’s in the best interests of those companies.”
Producers had been sustained by cash piles that were now eroding, Moody’s said. But even running out of money has not stopped supply.
Last month, Lonmin shareholders agreed to give the company $407 million (R5.8 billion) as the platinum producer sold shares at a fraction of the market price to keep its mines running.
Gold producer Petropavlovsk sold $335m of shares and bonds to avoid insolvency earlier this year. Both will keep producing into markets with prices at multiyear lows.
“We’ve seen very, very few bankruptcies over the past two or three years, despite the fact people are losing money and commodity prices have been coming lower,” Macquarie’s Hamilton said. “That’s been part of the problem.”
Those that have gone bust include two UK-listed iron-ore producers in Sierra Leone whose mines have since been bought and are planned to resume output. US coal producers Alpha Natural Resources, Patriot Coal and Walter Energy have sought bankruptcy protection this year.
Weaker currencies
in resource-rich countries such as South Africa and Chile have helped keep mines alive by cutting production costs because the output is sold in dollars.
But that benefit was a “finite lifeline” and would not protect the industry forever, Fidelity Investment Management fund manager Joe Wickwire said. – Bloomberg