Without going through all the changes in the top management of the world’s largest mining companies, there is one thing that stands about virtually all of these changes: putting more focus on investors and less on capital spending.
Barrick Gold Corp. (NYSE: ABX), Kinross Gold Corp. (NYSE: KGC), Rio Tinto PLC (NYSE: RIO), BHP Billiton Ltd. (NYSE: BHP), Anglo American and Newmont Mining Corp. (NYSE: NEM) in the past eight months or so have all changed, or will soon change, chief executives.
The sin that all these guys (and one woman, Anglo American’s Cynthia Carroll) committed was spending big on new properties back when commodity prices were booming, and now having to take huge write-downs as a result. Rio Tinot wrote down $14 billion in 2012, Anglo American wrote down $4 billion, BHP Billiton wrote down $3.3 billion, and Barrick wrote down $3.8 billion.
Needless to say, shareholders and analysts are not pleased. Forward price-to-earnings (P/E) ratios are in the single digits and implied gains range between 30% and 50%, signs of a value trap rather than an opportunity.
Costs have risen faster than the price of gold, silver, copper or most other metals, precious and base. Some of that rise comes from higher labor costs, but at least as much is due to falling ore grades. Miners just have to dig up more ore to meet production goals. A slowing economy has worked to tamp down prices as well, but that is not the biggest issue.
The mining executives who are now looking for new jobs tried to fix their cost problem the old-fashioned way by looking for more reserves and buying out smaller firms in a search for more profits. That did not work out too well.
The new regimes will focus on capital allocation and budget discipline, which they hope will push up share prices and return more value to shareholders. It is not a bad plan, considering that there is certainly more gold and silver on Wall St. than there is in some hole in the ground somewhere.
Can it work? Maybe, if by restricting production the mining companies can help drive up the price of gold. Making a scarce resource even scarcer always works to drive up prices. Look at oil for a good example.
Most of the miners expect either flat or small increases in production next year. Costs are expected to be flat at best with 2012 levels, so price will be the driver for mining profits. That is no better than a gamble, and that does not seem like the best way to run a mining company.