MAC/20: Mines and Communities

Is this the end of mining as we know it?

Published by MAC on 2009-01-19

It's an industrial triage.

Or, if you prefer the comment made last week by Alcoa's chief executive, "a perfect storm of historic proportion."

As predicted on this website last year, and despite some momentary rallies early in the new year, global base metals' companies are now confronted with virtually unprecedented falls in commodity prices. Worse, their ratings by banks and investors's services have been cut dramatically while companies are sacking workers by the thousands.

Could this be the beginning of the end of mining as we know (and many of us deplore) it?

Of course not - provided there's an early revival of the global economy and specifically of metals and mineral demand by China.

But such a scenario assumes that current rates of substitution of traditional metals for other materials; low degrees of metals' recycling; and the heavy burden of mine waste disposals, will continue as at present. Not to mention that existing levels of carbon emissions from the coal, iron/steel, cement and aluminium sectors, won't be forced severely downwards. - Let alone that community and other resistance to new projects will drastically diminish.

On the contrary, all these assumptions are woefully over-optimistic.

[Comment by Nostromo Research].


Citigroup cuts several European metals & mining cos

Reuters

14th Januaary 2009

Citigroup downgraded several European metals and mining companies, saying 2009 brings the most challenging conditions facing the industry in recent years as it expects weak consumption to persist.

"Commodity prices have been the single biggest driving factor for the mining sector over the past six years; rising prices have fuelled an increase in operating cash flow, earnings, mergers and acquisitions and capital expenditure," analyst Heath Jansen wrote in a note to clients.

The mining industry has been positioning itself for a V shaped recovery, and there could be more downside risk to come given the economic downturn, Jansen noted.

The analyst expects the companies with higher sustainable margins, strong free cash flows, and a flexible capital structure to outperform.

Citigroup downgraded Xstrata Plc (XTA.L), Kazakhmys Plc (KAZ.L), Anglo American Plc (AAL.L), First Quantum Minerals (FQM.L) and Randgold Resources (RRS.L) to "hold" from "buy."

It also cut Antofagasta Plc (ANTO.L) to "sell" from "buy."

© Thomson Reuters 2009 All rights reserved.


BHP Billiton cut to neutral by Credit Suisse

By Steve Goldstein

LONDON (MarketWatch)

13th January 2009

BHP Billiton Ltd was downgraded to neutral from outperform by Credit Suisse, saying the stock is "no longer oustandingly cheap" as it cuts commodity price forecasts for aluminum and copper and decreases expected production volumes from iron ore and coking coal. With the prospect of further downgrades on oil price revisions, "the risk-reward relationship is now not so attractive."


Codelco Debt Rating Cut by Moody's on Falling Copper

Bloomberg

13th January 2009

Codelco, Chile's state-owned copper company, had its debt rating cut one level by Moody's Investors Service on falling prices for the metal.

Moody's reduced its rating on the Santiago-based company's debt to A1, the fifth-highest of 10 possible investment-grade credit ratings, from Aa3, it said today in a statement.

Codelco, the world's biggest copper miner, may have to take on more debt to fund investments needed to improve productivity as the drop in copper prices squeezes profit margins, Moody's said in a statement. Copper has fallen 64 percent from a record $4.2605 a pound in May.

"Given the current copper pricing backdrop and weak end market demand, which we expect to continue through 2009 and in to 2010, Moody's anticipates Codelco will experience earnings and margin compression and tightened coverage ratios not appropriate for an Aa3 rating," the rating company wrote.

The potential for production disruptions and falling copper contained in ore will worsen Codelco's profit outlook, Moody's said. Codelco plans to spend $12 billion over the next five years to lift production, mining minister and Codelco Chairman Santiago Gonzalez said on Jan. 8.

Chile's President Michelle Bachelet on Jan. 5 announced a $1 billion injection into Codelco to help fund investment as part of an economic stimulus package.
To contact the reporter on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net


Alcoa loses $1.4b in its 'perfect storm' of a quarter

Jamie Freed

Sydney Morning Herald

14th January 2009

ALCOA's chief executive, Klaus Kleinfeld, said his company was caught in "a perfect storm of historic proportion" after the aluminium producer yesterday reported its first quarterly loss in six years.

Alcoa's fourth-quarter loss of $US929 million ($1.4 billion) - higher than all analyst estimates - included $US708 million in restructuring charges and a $US221 million operational loss.

"By December aluminium pricing was off 56 per cent from its July peak," Mr Kleinfeld said, noting inventories had risen during the period due to a lack of demand and available credit. "The price has never before fallen so fast."

Alcoa's joint venture partner, Alumina, revealed yesterday it would write down $40 million of spending on development projects when it releases its full-year results next month.

In Alcoa's accounts, the line signalling "minority interests" which usually correlates strongly with Alumina's earnings figures reported only $US1 million in profits for the quarter.

But Alumina's chief executive, John Bevan, told the Herald it had earned about $US60 million during the fourth quarter before the $40 million write-down and other adjustments.
Macquarie Equities said yesterday it expected Alumina would report an adjusted profit of $245 million next month. Alumina shares closed 9c lower at $1.43.

Alcoa's chief financial officer, Chuck McLane, warned investors to expect further pressure on alumina margins during the first quarter.

Alcoa has already revealed plans to cut 18 per cent of its alumina and aluminium production capacity in response to low prices and a lack of industrial demand.

Mr Kleinfeld said that peers such as Rio Tinto and Rusal had yet to make such deep production cuts, which would help Alcoa maximise its cash position during the downturn.
Rio's aluminium chief executive, Dick Evans, told Canada's Financial Post yesterday that Rio was likely to make further aluminium production cuts and to halt many growth projects in coming weeks.

Mr Evans - the head of Alcan before Rio's takeover of the Canadian company - also revealed plans to step down from the board on April 20 and transfer his executive responsibilities to Jacynthe Cote on February 1.

Ms Cote, the head of Alcan's smelting division, will be the first woman to serve on Rio's executive committee as the head of a mining division.


Aluminium, copper unit profit to fall: Rio Tinto

India Infoline News Service

15th Januaary 2009

Earnings will be negatively impacted due to sharp decline in aluminum prices. Provisional copper pricing to lower earnings by US$360mn in the second half of 2008

Rio Tinto said on Thursday that its production in the fourth quarter of 2008 was in line with expectations, but fourth-quarter earnings at its aluminum and copper units will decline because of falling prices.

The world's third-largest mining company said that iron ore output fell 18% during the quarter from last year. Production of bauxite increased 19%, while alumina output jumped 26% and aluminum production rose 21%, due to the Alcan acquisition.

Still, fourth-quarter earnings at Rio Tinto Alcan will be hurt by a sharp decline in aluminum prices, the Anglo-Australian miner said.

"Earnings will be negatively impacted as a result of a sharp decline in the aluminum prices," London-based Rio Tinto said in a statement today. Inventories of aluminum will be written down, it added.

A decline in copper grades at its Escondida mines led to an overall 18% decline in mined copper during the quarter, while uranium production increased 20%. The company said it expects provisional pricing of copper to lower underlying earnings by US$360mn in the second half of 2008.

Rio Tinto shares slumped 8.2% in Sydney today.

"We are taking firm action in response to the global economic downturn," CEO Tom Albanese said in a statement to the Australian stock exchange. Rio Tinto is scheduled to announce its earnings on Feb. 12.

Production of iron ore fell to 31.8mn metric tons in the October-December quarter from 38.96mn tons in the same quarter a year earlier, Rio Tinto said today. The company reported record output of 42.4mn tons in the third quarter.

The decline in output at Pilbara iron ore mines in the quarter resulted in a rise in unit costs and a general tightening of margins, Rio Tinto said. In November, the company said that it would curtail output at West Australian iron ore mines by 10%.

Iron ore accounted for 48% of Rio Tinto's operating income in 2007. A 10% price change alters the company's earnings by about 9%.

Aluminum production, which accounted for 9.5% of 2007 operating income, rose to 1mn tons from a year earlier, due to output increases that took place before Rio Tinto idled capacity. It has since shut capacity at high-cost plants, sold a share in a Chinese smelter and shelved its involvement in smelter projects in Saudi Arabia and Abu Dhabi.

Mined copper production slid to 149,100 tons, from 180,800 tons a year earlier, because of declining grades at the Escondida mine in Chile, the world's largest copper mine. Rio Tinto owns 30% of Escondida, which is operated by BHP Billiton.

Coking coal output gained 40% to 2.2mn tons, from 1.54mn tons a year earlier, Rio Tinto said.


 

Jamaica's largest bauxite company to lay off staff

Jamaica's largest bauxite and alumina producing company, Alumina Partners of Jamaica, will cut production by 50 percent and lay off staff.

Reuters

15th January 2009

KINGSTON - Jamaica's largest bauxite and alumina producing company, Alumina Partners of Jamaica, will cut production by 50 percent and lay off staff, a company official said here late Wednesday.

Officials at the company known as Alpart blamed the global economic slowdown for the cutbacks, which take effect on Thursday.

"The economic situation required Alpart to take immediate action," said the Managing Director Alberto Fabrini.

"Alpart has already introduced measures to reduce cost and increase efficiency. We have been in dialogue with the workers and their unions about the measures," he said in a statement.

The company, which has the capacity to produce 1.65 million tonnes of alumina each year, did not say how long the production cut will last.

Fabrini said 250 part-time or temporary workers would lose their jobs on a phased basis.
"The workers are not in agreement with this move, but they understand that the global crisis has impacted on this situation," said Vincent Morrison, president of the National Workers Union, which represents some of the workers.

Representatives from United Company RUSAL, the majority shareholder in the company, have arrived in Jamaica to meet with government and company officials and said they could not rule out further job and production cuts.

Norwegian aluminum group Norsk Hydro (NHY.OL) also owns a stake in Alpart.
Although other bauxite companies operating in Jamaica have not said they will cut production and staff, analysts believe that could occur soon. (Reporting by Horace Helps; Editing by Jane Sutton)

© Thomson Reuters 2009 All rights reserved


China to halt steel mill expansions to help stabilise markets

The Chinese State Council has said it will not allow any new steel mill expansion projects and try to help stabilise the domestic and global steel market

Reuters

14th January 2009

BEIJING - China vowed on Wednesday to stop its steel mills from expanding further as industry figures showed the sector carrying massive overcapacity which risks swamping domestic and foreign markets.

The State Council, which also agreed measures to support its carmakers, said it would allow no new steel capacity expansion projects and would adopt a flexible tax policy on steel exports to "stabilise" China's share of the global steel market.

China has the world's biggest steel sector, with rampant growth fuelled by an economic boom that ran out of steam over the last few months.

Steel capacity reached 660 million tonnes at the end of 2008, a China Iron and Steel Association official said at an internal government meeting on Tuesday, the China Securities Journal reported.

CISA officials later told Reuters the proper figure should be 616 million tonnes.
Industry analysts said both figures are plausible.

Either way, 2008 showed strong growth despite the weakening market. Chinese steel capacity at the end of 2007 is estimated at about 550 million tonnes.

"Everyone keeps saying the steel price has recovered, but this overcapacity is still there. As soon as the price improves a bit, they'll start up again," said analyst Henry Liu, of Macquarie Research. "It's not good for the industry."

Nor is it good for relations with trading partners, whose own steel mills have cut output aggressively as the global financial crisis decimated demand.

Chinese output rose only 2 percent in 2008 to 500 million tonnes, according to CISA estimates.

For several years Chinese mills relied on export markets to take about 10 percent of their output. China sold a net 52 million tonnes of steel into world markets in 2007, feeding a building boom in Dubai but enflaming trade sensitivities.

Although China's domestic steel market was showing signs of weakness in May, it was masked by export demand until after the August Olympic Games. When export markets crashed, China's steel industry reeled.

Net exports shrank to 45 million tonnes in 2008.

LOBBYING

Record raw materials costs combined with plummeting prices have hurt returns, even at model national mills like Baosteel Group, which includes Baoshan Iron & Steel Co (600019.SS) where profits dropped by 32 percent in 2008.

China's policies to rein in capacity have been mostly ineffectual over the last few years.
Some in the steel industry expect the government to add financial incentives to encourage medium and large size mills to merge, while forcing smaller mills with outdated, polluting furnaces to shut.

The state council's measures, which were not released in detail, could compound the challenges for 2009.

"All in all, things aren't looking too good for the steel industry this year," said Yuan Hui, steel channel director at industry website Umetal. (Additional reporting by Niu Shuping, Editing by Peter Blackburn)

© Thomson Reuters 2008. All rights reserved.


Baosteel's profits fall 32 percent - to $3.4 billion

Top Chinese steelmaker Baosteel's profits fell around 32 percent last year as furnaces were idled at some plants.

Reuters

14th January 2009

SHANGHAI - Net profit at Baosteel Group, one of China's top steel makers, dropped 32 percent last year to about 23 billion yuan ($3.4 billion), the Shanghai Securities News reported on Wednesday.

Steel demand from industries such as shipbuilding shrank rapidly in the last few months of the year, forcing the group, which includes listed unit Baoshan Iron & Steel Co (600019.SS), to idle some furnaces in the final quarter, the newspaper quoted an unnamed, senior Baosteel official as saying.

Baosteel's output in the fourth quarter fell about 30 percent, the official was quoted as saying. The listed unit is due to release its 2008 earnings report in late March.

Other large steel groups also suffered from falling demand and tumbling steel prices in the fourth quarter, the newspaper noted.

Gross profit at Wuhan Iron & Steel Group, which includes Wuhan Iron & Steel Co (600005.SS), slid 18 percent to 7.6 billion yuan last year, the newspaper quoted an unnamed source in the group as saying.

The group cut as much as 28 percent of its production at one stage last year and some of its furnaces are still idled, the newspaper added.

Hebei Iron & Steel Group, which was formed last year, cut 25 percent of its production in the second half and still has 11 furnaces idled, the newspaper reported.

It said Shandong Iron & Steel Group's 2008 profit fell over 50 percent to about 3.5 billion yuan.

China's government will discuss concrete steps this week to support its auto and steel industries, which could include tax cuts and incentives to promote consolidation.

China had steel production capacity of 660 million tonnes by the end of 2008, compared to an estimated output of 500 million tonnes, the China Securities Journal reported.

Sixty percent of China Steel and Iron Association's members have reported production plans for this year, showing a combined output increase of 30 million tonnes, the newspaper said, quoting the association data. ($1 = 6.83 Yuan) (Reporting by Rujun Shen; Editing by Keiron Henderson)


Peru sheds 5,460 mining, steel jobs

Associated Press

13th January 2009

LIMA, Peru - A Peruvian labor federation says 5,460 mining and steel workers have lost their jobs since the start of November as sinking global mineral prices hammer the mining sector and stall new investments.

The secretary-general of the National Federation of Mine and Steel Workers says his 130,000-strong organization is planning to strike in February to protest the layoffs.

Luis Castillo Carlos said Tuesday that in one instance 800 miners were fired at Newmont Mining's Yanacocha gold mine.

Mining is the engine behind Peru's eight-year economic boom and its estimated 9 percent growth rate in 2008. The government projects growth will slow to 6 percent this year.

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