If anyone had any doubts that mining was an uncertain business, events of the recent months would quickly dispel them. Tom Albanese, CEO of Rio Tinto, has been the latest casualty, after the company announced an eye-watering US$ 14 billion writedown of its aluminium and Mozambique coal businesses. Cynthia Carroll, CEO of Anglo American, will depart in April after her five years in the hot seat have seen the company’s value drop by 28%, while BHP Billiton is also seeking a replacement for its CEO, Marius Kloppers, although no time frame has been given for his departure.
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As the mining industry settles into leaner times, it is paying for its past extravagances. In addition to Rio Tinto, Anglo American has been forced to swallow a US$ 4 billion writedown on its Minas-Rio iron ore project in Brazil – and may never recoup the eventual project costs, which are currently projected to be US$ 8.8 billion. BHP Billiton is in the best shape, but this is perhaps more luck then judgement: the failed acquisition of Rio Tinto then the attempted merger with its rival’s Australian iron ore business, as well as the failed bid for Canada’s Potash Corp., now seem like bullets dodged. All the same, it has still taken a US$ 2 billion writedown on its US shale gas assets.
As the mining houses have faced up to the new reality, so too the equipment suppliers. A number of these have reduced their earnings forecasts for 2013 on the back of weak demand in North America and Asia, including Caterpillar and Joy Global (see “Mining equipment suppliers expect a tough 2013”, p. 5). Caterpillar has also been stung by a US$ 580 million writedown on its acquisition of ERA Mining Machinery Ltd and its subsidiary, Zhengzhou Siwei Mechanical & Electrical Manufacturing Co., a maker of roof-support equipment for underground coal mines in China. The Peoria-based company was apparently the victim of a massive fraud, although it is unclear how the company and its advisors failed to pick this up during due diligence (see “Caterpillar takes a US$ 580 million writedown on investment”, p. 8).
The choppy waters through which the mining industry must now navigate call for a new leadership style. The days of the swashbuckling empire builder have passed: the mining industry now needs steadier pairs of hands that can chart the way through economic weakness, increased political interference and ballooning project costs without running aground.
For those up to the challenge, there are signs the storms might be weakening. In its 2013 forecast, Caterpillar said it expects stronger growth in China in H2 2013 for annual growth of 8.5% (compared to the International Monetary Fund, which expects 8.2%; growth in 2012 was 7.9%). “It is not going to be a 2010 – 2011 boom in China, but [rather] an improvement from this year that should be good for commodity prices and, as important, it should be better for commodity demand,” said Michael DeWalt, Caterpillar’s corporate controller. For an industry that is feeling a touch seasick at the moment, that is good news.