Miners' Investments Much Smarter Today Than in 70s & 80s

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Commodities, Global Trade

There was a time back in the 70s and 80s when oil and mining companies were both vertically integrating into processing, refining and distribution, and horizontally investing into many unrelated industries oil companies into mining and so on that made little long term sense. Predictably, enough of these deals unwound in the years that followed and many a division management team became entrepreneurs (and millionaires) overnight as they led management buyouts from their former parent multinational.

Arguably, some like BHP, itself the result of mergers into multiple metal categories and stages of the supply chain, was embarking on something similar with its now-failed bid for Potash Corp of Canada. Many see such bids as a result of frustration born from lack of development opportunities within the firm’s core areas of activity as they are genuinely sound investment strategies.

Recently though, miners have been forced to consider expansion into other areas of activity in order to support or maximize their core investments. The logic for allocation of funds in these areas is solid and ultimately should add to the long-term viability of their core business.

A prime example is Vale’s investment in a fleet of iron ore-carrying cape vessels. The purpose is to enhance their ability to compete with Australian miners shipping over much shorter distances. Vale is to take delivery of the first of 36 x 400,000 ton ore carriers from June next year and according to the Hellenic Shipping News, has plans to increase this to 80-100 vessels over the next 5-10 years. Freight rates were running at $45,000 per day during the summer but Vale believes running their own fleet will drive costs down to $10-12,000 per day and allow them to compete with Australian miners in realizing similar FOB prices. Historically, Vale has had to accept much lower FOB prices than Rio or BHP because freight costs have been higher from Brazil. With guaranteed cargo on long-term supply contracts to Japan and China, Vale should be able to run their shipping fleet at cost and still achieve significantly higher FOB values for their CIF/CFR iron ore sales.

A second example is the move by miners into power generation. As miners have expanded into less well-developed regions, the provision of power has become a major hurdle to exploitation of viable reserves. Even in some well-developed markets, power supply problems are impacting plants’ ability to run at capacity and have caused the postponement of planned expansion plans. A Reuters article explains how Xstrata and Anglo American are working on feasibility plans to use waste coal (coal that is left on waste tips as being unsuitable for normal power generation plants) in South Africa to fuel new technology power generation plants. Xstrata is in the midst of a feasibility study for a 300 megawatt plant using cheap waste coal in South Africa that would cost about $750 million to provide power to an expanded Ferro-chrome smelter, in addition to plans for a power station for its Knaimbo nickel plant in New Caledonia and a power project for its copper division in Chile.

Indian aluminum producer Vedanta was forced to build a series of power plants to supply its aluminum smelters because the Indian domestic grid supply was so unreliable. The group has about 5GW under construction and is already the largest independent power producer in India. Likewise, Kazakhmys, the world’s 10th largest copper producer, is also the largest power provider in Kazakhstan, with three power stations dedicated to providing power for its copper division in addition to one of the world’s largest coal-fired power stations soon to generate 4GW, much of it to go into the national grid.

Miners, of course, are no strangers to infrastructure investments. Australian firms have had to build railways and ports at home just as they have been forced to do in places like west Africa where no such infrastructure exists. Such projects along with power and shipping services build support for core assets in a way that earlier miners’ spending sprees never did.

–Stuart Burns

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