Writedowns Near $50 Billion as M&A Haunts Mine CEOs: CommoditiesThomas Biesheuvel and Jesse Riseborough
The world’s biggest mining and steel companies have wiped about $50 billion off project valuations in the past year and the purge is poised to continue this earnings season as managers reassess expensive takeovers.
Anglo American Plc, Vale SA and Rio Tinto Group led the writedowns as declining metal prices, rising project costs and slowing demand forced reviews. Glencore International Plc may write down some nickel and copper assets acquired through its takeover of Xstrata Plc, Liberum Capital Ltd. has said. BHP Billiton Ltd. may trim aluminum operation valuations, according to Goldman Sachs Group Inc. and Sanford C. Bernstein Ltd.
Executives and shareholders are paying the price for a $1.1 trillion M&A binge over a decade. Failed deals in aluminum and coal caused $14 billion in writedowns at Rio and cost Chief Executive Officer Tom Albanese his job this month. Cost overruns contributed to Cynthia Carroll’s departure as CEO of Anglo American, which slashed $4 billion off the value of its Minas-Rio iron-ore project in Brazil yesterday. She leaves in April.
“Companies are now starting to come clean with many of the mistakes they’ve made over the last few years,” Evy Hambro, manager of BlackRock Inc.’s $12 billion World Mining Fund, said in an interview with Bloomberg Television. “It wouldn’t surprise me to see more writedowns.”
A writedown is a reduction in the value of an asset carried on a company’s financial statement if it’s deemed to be overstated compared to the current market value. Estimated valuations can be reviewed over time.
Anglo American fell 20 percent in London trading last year, while Glencore slipped 10 percent. BHP gained 13 percent and Rio Tinto 12 percent. Earnings from Melbourne-based BHP are due Feb. 20, while Glencore’s 2012 financials are expected March 5.
The mining industry’s merger and acquisition missteps have been compounded by higher costs for energy, labor and construction materials. That has trimmed profits, sapped investor appetite for further deals and spurred calls for greater returns.
The Bloomberg World Mining Index rose 2.9 percent last year after dropping 31 percent in 2011. The Dow Jones Industrial Average gained 7.3 percent last year and 5.5 percent in 2011.
Glencore may write down as much as $2 billion following its $37 billion takeover of Xstrata Plc, due to be completed in March, according to Richard Knights, an analyst at Liberum said.
BHP, the world’s biggest mining company, may lower the valuation of its nickel and aluminum assets by about $5 billion, Bernstein said in a report today, while Goldman Sachs said in January that BHP may take a $2 billion to $3 billion impairment on aluminum. BHP in August announced a $3.3 billion charge on gas and nickel assets. Spokesmen for BHP and Glencore declined to comment.
Rio Tinto slipped 0.7 percent to 3,552 pence by the close in London, while BHP was little changed at 2,149 pence. Anglo American fell 2.3 percent and Glencore dropped 0.6 percent.
“It’s a hangover effect from the metals and mining euphoria we’ve had in the past 5 to 10 years,” Jeff Largey, a London-based analyst at Macquarie Group Ltd., said in an interview. “Decisions made are now coming home to roost.”
Natural resources companies went on a deal spree in the past decade, spending $1.1 trillion chasing growth, according to data compiled by Bloomberg. Merger and acquisition activity peaked in 2006 when mining and metal businesses spent more than $200 billion.
Anglo American said yesterday its Minas-Rio project, which has been dogged by delays and budget overruns, will now cost $8.8 billion to develop, up from $2.6 billion when Anglo bought it in 2008. Anglo’s biggest shareholder, South Africa’s Public Investment Corp., said in October that Carroll made poor decisions on how to spend cash.
The Anglo writedown will help “clear the decks” for new CEO Mark Cutifani, according to Paul Gait, a mining analyst at Bernstein.
Vale is taking a $4.2 billion charge after lowering the valuation of a nickel mine and its stake in aluminum producer Norsk Hydro ASA. The Rio de Janeiro-based company expects to announce a second impairment “of around $50 million to $100 million in several different assets” with the release of its 2012 results in February, Chief Financial Officer Luciano Siani said Dec. 6.
“Our intention is to clean up the balance sheet quite soon,” he told a presentation to investors in London.
Several management teams have been made to pay for their mistakes. BHP chief Marius Kloppers forewent his bonus after the writedown, while Rio’s Albanese went without a bonus in 2011 and 2012 after further writedowns on Alcan assets.
BHP’s share price has “suffered from the perceived bad deals conducted in shale gas,” Goldman Sachs analysts wrote in a Jan. 18 note.
The company said last week the strong Australian dollar and weak prices were hurting its local alumina and nickel operations, spurring speculation of possible writedowns or asset sales.
“If the companies had been better guardians of shareholder capital then we would have better performance from the shares.” Hambro said in a Jan. 17 interview. “What we are after is just greater discipline in the way these companies allocate the capital because these are mistakes. These are things that shouldn’t have been done.”
Gold CEOs have also angered investors. Kinross Gold Corp.’s CEO Tye Burt was fired after he presided over a $2.49 billion writedown on the Tasiast mine in Mauritania, an asset Kinross acquired as part of its C$8 billion ($8 billion) purchase of Red Back Mining Inc. Newmont Mining Corp. took a $1.61 billion writedown on its Hope Bay project in Canada, while Barrick Gold Corp. CEO Aaron Regent left in June against a backdrop of cost overruns.
“Investors have to share some of the blame,” said Largey. “They were pushing companies to grow, they were rewarding companies that had the most attractive growth pipeline and now they’ve swung to the other side saying it’s all about capital discipline and allocation.”
Steel producers have also been forced to adjust the value of their businesses as Europe’s economic crisis saps demand and slower Chinese growth weighs on commodity prices.
ArcelorMittal, the world’s biggest steelmaker, said last month that it will write down its European business by $4.3 billion as the region’s weakening economy erodes demand and leaves producers with excess capacity. ThyssenKrupp AG last month took a 3.6 billion-euro ($4.8 billion) charge on its Americas unit as the company seeks to sell the two plants that cost more than 10 billion euros to build.