The biggest mining companies are set to spend about $244 billion on expansions to 2015, slow to heed Glencore Xstrata Plc Chief Executive Officer Ivan Glasenberg’s call for austerity to end an oversupply in mineral markets.
That’s just a 2.4 percent drop from the $250 billion in capital expenditures made in the previous three-year period, according to forecasts compiled by Bloomberg for the 20 largest mining companies by market value. Glasenberg joined a chorus of investors pushing for spending cuts after the companies had to make $60 billion of writedowns over 18 months.
From BHP Billiton Ltd. (BHP), the world’s biggest, to Rio Tinto Group, industry members are telling investors they’ve become more optimistic for demand growth in the U.S. and China, the biggest minerals buyer, and that future capex will be more disciplined. The Bloomberg World Mining index has jumped about 16 percent from a four-year low in July.
“Institutional shareholders still feel that management need to prove to them that over the long term the discipline associated with capital allocation is there,” Catherine Raw, co-manager of BlackRock Inc. (BLK)’s $7 billion World Mining Fund, said yesterday in a phone interview from London. “They could always do more. Shareholders are not releasing the pressure.”
Glasenberg’s own Baar, Switzerland-based Glencore, in which he holds an 8.3 percent stake, estimates spending of $29 billion on new projects over the next three years before outlays drop to $4 billion to $5 billion annually, the company said in May. Spokesmen for Glencore and Rio declined to comment. London-based Rio is looking to cut capital spending 20 percent to about $14 billion this year, with a similar drop the following year.
“Investors are happy with growth, if it’s high-returning growth,” said Paul Young, a Deutsche Bank AG analyst in Sydney with buy ratings on Rio and BHP. He cites shareholder approval of their iron ore and copper expansions. “Capex relative to history is still high, but the growth is all good growth.”
Annual expenditure by the top 20 is forecast to drop by about a third to $66 billion in 2015 from 2012 levels, in line with Glasenberg’s push. The three-year comparison is little changed, because of the number of projects put in motion in recent years that have helped create an oversupply of commodities including copper.
Glasenberg in an Aug. 21 interview applauded his peers for responding to his call to restrain spending and had set the tone for the new “age of austerity” for miners, Bank of America Corp. analysts said in May. In the past 18 months, BHP, Rio and Anglo American Plc (AAL) were among the mining companies to appoint new CEOs, and they began to rein in future capex budgets, sell assets and cut workers.
Investors including BlackRock, the world’s biggest money manager, have been pressuring mining companies to boost shareholder returns and defer building mines as waning demand and declining prices erode profits.
“Where I would say we are still cautious and still waiting is whether or not they’ve actually changed religion,” BlackRock’s Raw said. “We just feel the genetics of current management haven’t necessarily changed. However, we do appreciate that there is a much greater focus on cost delivery and on free cash flows versus previously.”
BlackRock’s World Mining Fund has dropped about 23 percent this year, beating the 25 percent decline in the Bloomberg mining index.
BHP, after putting an estimated $68 billion of projects on hold last year, including its Jansen potash project in Canada, last month decided to proceed with a $2.6 billion investment in Jansen, which may end up costing $15 billion. Rio, the world’s second-biggest iron ore exporter, is planning an estimated $5 billion expansion in Australia.
Fiona Hadley, a spokeswoman for BHP, declined to comment on the company’s spending plans and noted a May speech by CEO Andrew Mackenzie saying BHP would “remain focused on value and returns above all else.” The company’s spending will fall this year and capital will be directed “even more selectively” toward major operations, he said last month.
“There has been a push for more efficient use of capital, which doesn’t necessarily mean you shouldn’t develop projects,” Neil Boyd-Clark, executive director at Arnhem Investment Management who helps manage about A$3.5 billion ($3.2 billion) including BHP and Rio shares, said in a phone interview. “They have got the capacity to grow their businesses and demand for commodities continues to grow.”
Vale, the biggest iron-ore exporter, is planning to spend about $15 billion on expansions in both 2014 and 2015, according to Chief Financial Officer Luciano Siani. In July it forecast a 10 percent increase in steel output this year in China, the world’s largest steelmaker, saying the nation proved pessimists wrong. China’s iron ore imports set a record in July, leading gains in purchases of raw materials by the biggest consumer.
The 111-company Bloomberg mining index’s recent gains came after hitting a four-year intraday low in July as metal prices plunged in London and after iron ore touched a seven-month low in May. The outlook for minerals has brightened after Chinese Premier Li Keqiang said in July the world’s biggest buyer of metals will speed railway construction.
“We are now seeing new project approvals for these urban rail systems across China that’s about $5 billion to $8 billion dollars of capital investment,” John Meyer, a mining analyst at London-based SP Angel Corporate Finance LLP, told Mark Barton on Bloomberg Television’s “Countdown” in an interview. “Those rail systems use huge amounts of metals. Specialty metals, nickel, vanadium, manganese, iron ore -- that’s going to drive demand beyond expectations through the second half.”
To be sure, not all the producer’s plans have met shareholder approval. BlackRock’s Evy Hambro, who manages the World Mining Fund with Raw, pointed to BHP’s Jansen potash project, saying Aug. 7 that events in the world potash market made any large-scale investment unattractive. Still, slowing spending to preserve it as an option makes sense, he said.
BHP’s Jansen project will be looked at with a “high degree of scrutiny” by investors, Paul Gait, a London-based mining analyst at Sanford C. Bernstein Ltd., told Francine Lacqua on Bloomberg Television’s “On the Move” in an interview. “This feels a lot like this kind of grand greenfield project, building these grand tier-one assets.”
BHP, targeting a 27 percent drop in capital spending to $16 billion in fiscal 2014 from $21 billion in fiscal 2012, Rio and Glencore all raised dividends last month. Those three companies and Anglo American, the four biggest miners on the London bourse, boosted their combined payout to about $5.8 billion for this earnings period from $5.2 billion a year earlier.
“Increasingly, companies seem to be listening,” said Paul Phillips, a Melbourne-based fund manager with Perennial Growth Management Pty that holds BHP shares. “On a one-year or two-year view, I’m pretty positive that they’ve listened, but on a 10-year view” it’s less certain, he said.
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