Xstrata Rolls Up Its Sleeves, Gets Back to Its Roots

I hope I am not alone in being hugely encouraged by a headline in the Financial Times stating “Xstrata steps up spending plans. It was not the fact that the miner was increasing spending, which comes as no surprise with metal prices back to near record highs; it was the fact they were increasing capital expenditure on their internal portfolio instead of the dubious spending sprees we have seen miners engage in over recent years, like the ludicrous prices paid for acquisitions like Alcan by Rio Tinto that left the latter on the verge of bankruptcy when the markets turned. Rio buying Alcan did not yield one ton more metal for the world, but Xstrata’s increase on capex from US $4.5 billion for 2011 and 2012 to $6.8 billion will result in increased metal availability in the years to come.

“Years to come” is, of course, the problem. Part of the reason we have record prices now for metals like copper is a result of under-investment in the 1990s and 2000s during times of low commodity prices (or when miners’ focus was on easy expansion by acquisition). Now the copper market is in deficit and, according to an FT article, is bracing itself for a 500,000 ton deficit next year — and that is before the impact of ETF Securities’ new physically backed copper, nickel and tin funds starting this Friday. Part of copper’s surge above $9,000 per ton this week is due to the expectation that ETFS’ copper fund will prove popular and, as a result, tie up LME physical metal that would otherwise be available for consumption.

A Telegraph article this week by Rowena Mason adds more detail to Xstrata’s focus on organic growth, saying the miner is the world’s biggest exporter of coal and the extra spend will primarily be on coal, copper and nickel projects. The firm singled out the Ravensworth North coal mine in Australia as the target of a $1.3 billion expansion plan. This mine is scheduled to start producing 8 million tons of coal from 2012. It is currently expanding about 20 mines across the globe and had already increased its capital expenditure program by $5 billion in August.

Nor is Xstrata alone: Rio Tinto is raising capital expenditure on internal assets from US $7 billion this year to US $11 billion next year, and like Xstrata expects to keep an elevated level of investment for some years to come. Even though miners are increasing spending now, this will not equate to increased metal availability for many years to come, in some cases up to 10-15 years into the future — such is the long term nature of major mining projects. So while it is encouraging to see miners commit hard cash to developing in-ground resources, it won’t save us in the short term from higher metal prices if the impending impact of continued emerging market demand collides with increased financial investment vehicles such as ETFs driving another bubble.

–Stuart Burns

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