--Companies cut planned expansion spending to appease
shareholders
--With tens of billions on the chopping block, analysts worry
supply will fall short when demand recovers
--New mines take years to develop, while old mines take months
to restart
--The mining sector has a history of missing profits due to
overzealous output cuts
By Tatyana Shumsky
Mining companies are cutting expansion plans--a strategy that
puts them at risk of losing market share when the economy recovers,
according to some analysts--as management caters to investors'
desires for returns over growth.
Industry titans like Rio Tinto PLC (RIO), BHP Billiton Ltd.
(BHP) and Anglo American PLC (AAL.LN) are slashing billions of
dollars from planned expansion spending to appease shareholders
worried about profitability in the face of the sluggish
global-growth outlook. These companies have resisted calls to rein
in spending on projects before but, after some investors voted with
their feet and drove down some stocks more than 25% last year,
management complied.
"I would not expect to see for us any major new capital
approvals in the near term," said Rio Tinto Chief Executive Tom
Albanese in a recent conference call, adding that this year's $16
billion investment in capital projects will form a peak in spending
that will decline in coming years.
The sentiment is echoed across the industry. The 40 largest
mining companies in the world were on track to invest a record $140
billion in expanding existing mines and developing new ones in
2012, according to consultancy PwC. However, reaching that target
is unlikely after recently announced spending cuts, said John P.
Gravelle, leader of PwC's Americas mining group.
Analysts warn that this retrenchment strategy is risky. Reducing
investment in new projects today means miners won't be able to ramp
up output and make larger profits when global growth recovers, they
say.
While factories can add a new production line in weeks, new
mines can take years to develop while older mines take months to
shut down and restart, said Barclays' analyst Andrew Kaplowitz.
"Copper mines are some of the hardest to get over the finish
line," so there is potential for mining companies to lose market
share to more-nimble competitors if they pull back, he said.
Moreover, mining companies have a history of missing rebounds in
commodity prices thanks to overzealous cutbacks.
The town of Ruth, in Nevada's White Pine County, is home to one
such story--the Robinson copper mine. Operating since the early
1900s, the mine was shut in 1999 by then-owner BHP Billiton because
of low copper prices and concerns about demand.
Throughout 2003, as copper prices doubled to $1.0455 a pound,
the Robinson mine stood idle and BHP missed out on potential
profits. In 2004, BHP sold the operation to Quadra Mining Ltd.,
which restarted the mine. Still, the mine took months to ramp up
and only reached full capacity by December 2004. That year alone,
copper prices gained 39% to $1.4525 a pound by year end.
"The market thinks that you can make decisions just like that,
but to shut things down or put it into care and maintenance takes
time," said Derek White, chief executive at KGHM International, who
had overseen the Robinson purchase as an executive at Quadra.
"In the late '90s, copper prices really came down, and
strategically, companies like BHP Billiton made the decision to
shut down certain mines," Mr. White said, adding, "It's not
unusual, and it's not just the Robinson mine."
But this strategy can backfire, said Anthony Rizzuto, an analyst
with Dahlman Rose & Co.
"If the industry generally pushes off supply development, the
few that are able to achieve supply growth will be the winners,"
Mr. Rizzuto said. "Not only will they benefit from tighter
supply/demand and a higher-price environment, but also from higher
volume growth," he said.
Mining companies, however, are pushing ahead with the spending
cuts. Anglo American slashed its spending plans by $1.5 billion, or
21%, and BHP shelved plans for more than $50 billion in expansion
projects and won't approve new major developments until mid-2013.
Freeport McMoRan Copper & Gold Inc. (FCX), the world's largest
listed copper miner, joined the fray with a $400 million reduction
in spending for 2012, with Chief Executive Richard Adkerson
emphasizing the company's focus on "our best projects."
The world's largest mining companies are likely to keep their
spending flat or curtailed by as much as 10% in 2013 compared with
2012, according to Barclays.
Investors don't appear to be worried about future profits.
Instead, some managers are picking out mining stocks that will
return money to shareholders rather than growing its project
pipelines.
"I'm looking for a company that's going to put [cash] back into
my pocket rather than spending it on something else," said Charl
Malan, who manages $3.8 billion at the Van Eck Hard Assets Fund
(GHAAX).
Other fund managers worry that China--the engine for global
commodity demand--has peaked and that the country's demand for raw
materials like iron ore, copper and coal will drop as economic
growth there sinks below 8% in 2012 for the first time in since
1999.
"We're in a new world where [people] think China is slowing
down, and that gives everyone a different criteria by which to
judge potential winners in the mining space," said John Corcoran,
investment director for alternatives at Oppenheimer Funds.
Investors are also concerned that planned expansions won't be
profitable because costs like wages and equipment continue to rise
while the prices of many commodities are declining, having peaked
in the super cycle of 2003 to 2008.
"If the cost of building a new project continue to rise while
commodity prices, which are eventually going to be your revenues,
are declining, it makes the project a lot less interesting," said
Rick de los Reyes, who manages $800 million at the T. Rowe Price
Global Metals and Mining Fund.
But in the long run, appeasing shareholders today may shift the
market balance toward tighter supply in the future and help lift
commodity prices when the world's economy is back on track.
"Holding off on spending is going to help prove them [mining
CEOs] right, because the supply is not going to come online as fast
as it otherwise would have and that's going to keep prices high,"
Mr. Gravelle said.
-Write to Tatyana Shumsky at tatyana.shumsky@dowjones.com
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