Mining investors are hoping that a change of guard at the top could see them showered in cash over the next few years. However, it’s probably best that they don’t hold their breath.
The chief executives of most of the major London-listed miners are either leaving, have left, or plans are in action to find their successors. Investors are already clamouring for higher cash returns after a period of high-spending expansion.
Rio Tinto’s Tom Albanese has already gone , replaced by Sam Walsh, his former number two, and a search is on for Marius Kloppers’ replacement at BHP Billiton (NYSE: BBL - news) . Mr Kloppers will leave “in the next 24 months”. Following the completion of the Glencore-Xstrata (Other OTC: XSRAF - news) merger, Xstrata chief Mick Davis will leave the enlarged group.
The outgoing crop of chief executives have all been through boom and bust over the past few years, with a lot of the bust exacerbated by their own decisions.
Over-enthusiastic M&A at the top of the cycle meant most chief executives overpaid for assets. That means a series of writedowns are on the cards as new blood “kitchen sinks” all the bad news by getting it out at once.
However, most of these charges have already been anticipated by the market and investors are expecting that cash piles will grow as spending slows.
Liam Fitzpatrick, an analyst at Credit Suisse (NYSE: CRP - news) , said: “The sector is past peak capex [capital expenditure] and margins are improving on higher prices and reduced cost pressures.” But he said company cashflows will not see a major uplift until 2014 and beyond because significant investment is still needed this year.
Things are looking fairly bright in a sector that spent 2012 coping with soaring costs and falling commodity prices. But prices have recovered from lows and miners are producing more of their product than they ever have before.
Shipments of iron ore to China from Australia’s Port Hedland climbed by a quarter in December on a month-on-month basis, rising 21pc over 2012. Production of iron ore from the Pilbara region of Western Australia is expected to rise 17pc this year. Coal exports are expected to jump 10pc.
Andrew Keen, a mining analyst at HSBC in London, sees a new, prudent approach to spending from mining executives, leading to an improvement in their companies’ financial positions.
“We are entering a period of more conservative capital allocation to which all will conform,” Mr Keen said. “This means cuts in capital spending, deferral of the approval of major projects and financial consolidation. Balance sheets are likely to look healthy at the end of 2013.”
However, he said this trend was not going to be driven by the new management teams. “We think capital discipline is improving, but more because this is the prevailing demand of investors, rather than because this crop of CEOs is changing,” he said. “In our view, rather than personalities, strategy is driven more by market circumstances, and the whims of investors, than either CEOs or investors are probably comfortable to admit.”
So investor pressure is likely to lead to what investors want a cash return. Special dividends over the next few years seem likely, as do buybacks.
However, “maverick” chief executives could still carry on spending. There is talk that once Glencore completes its merger with Xstrata it is considering making a bid for Anglo American.
Then there’s Mr Davis, who has M&A in his blood. Speculation is that he could join a private equity house and go on a spending spree that isn’t scrutinised by the public markets. Then he really would be in the driving seat and could ignore the short-term whims of the City. The spending may not be over yet. GW
= Copper =
Copper prices received a fillip at the end of last week after car sales hit a record in China. January passenger vehicle sales in the Asian nation jumped 45pc year-on-year to 1.7m units. The figure is 9.2pc higher than in December. Copper is an economically sensitive metal because of its use in wiring and pipe. A conventional car contains between 20kg and 25kg of copper, according to research by the European Copper Institute.
Hybrid cars have not yet taken off in China, but US manufacturer Tesla Motors (NasdaqGS: TSLA - news) recently revealed plans to open a shop in Beijing. Should they take off, copper demand will soar, as hybrid vehicles contain about 33kg of the metal. GW
= Rarer steak US cattle herd drops to 61-year low as feed costs soar =
A tasty Texan steak just got a little rarer, after the size of the US cattle herd hit a 61-year low.
Farmers have been slaughtering their herds as feed costs soar due to drought in grain growing regions in the US Midwest and Russia.
This is the sixth-consecutive year that the cattle herd has shrunk, hitting 89.3m head, an annual fall of 1.6pc. The number of animals being reared for beef has slumped by 11pc since 2007. This is despite US cattle prices being at historically high levels at about $125 per animal. US beef output may drop 2.4pc in 2013, as the pace of slaughter slows down, according to industry researcher CattleFax.
Scott George, incoming president of the National Cattlemen’s Beef Association, told Reuters: “It’s rather bleak but we’ve never seen such high prices for the cattle, so, there are opportunities out there if a guy has grass and moisture and can run cattle.”
He remains “cautiously optimistic” that the country’s beef sector will recover.
Beef production this year could suffer its second largest year-on-year decline in the past 35 years, according to Derrell Peel, a livestock specialist at Oklahoma State University. He believes US domestic beef production could fall 4.8pc this year.
Such a fall has only been outdone once, in 2004, when the US herd shrunk by 6.4pc following the discovery of BSE. GW