There are probably dozens of ways to describe the experience of Canadian and U.S. mining giants abroad. Let’s start with “the grass is always greener on the other side of the hill” which best addresses the investment strategy and experience of many of the world’s largest mining companies operating in foreign jurisdictions. While some have done reasonably well because they have limited their CAPEX risk by investing in smaller projects, others has ranged from borderline success to outright disaster. Not surprisingly, the number of senior executives being chopped from the ranks of some of the world’s largest mining companies has reached epic proportions – and deservedly so.
Among the highest profile casualties in the past year was Cynthia Carroll, the Harvard educated CEO of Anglo American, who stepped down in mid-April. During her tenure the market capitalization of the company dropped by about $25 billion while its competitors grew or at least retained their market value.
Contributing to the company’s poor performance was the Minas Rio iron ore project in Brazil which has faced regulatory hurdles and legal challenges, resulting in soaring costs and delays. Despite its vast resources, Brazil has managed to become a bureaucratic nightmare that would test the resolve of any large company. Anglo American has already taken a $4 billion write-off for Minas Rio which is estimated to have a completion cost of approximately $9 billion. At last report the company was looking for a partner for the project.
Rio Tinto plc recorded a $14 billion write-down last year, most of which related to its purchase of Canadian aluminum producer, Alcan. As far as bad deals go, this will surely hold the record. Not only was it the largest mining and metals deal in history, the acquisition was done at a 20-year peak in aluminum prices and followed a bidding war with other mining giants who are no doubt grateful they lost. Rio Tinto’s CEO, Tom Albanese, subsequently resigned along with another senior executive who led the acquisition and integration of the company’s Mozambique coal assets which was the subject of a $3 billion write-down.
Barrick and Kinross have also traveled the same road, paying too much for marginal assets. The former purchased Equinox Minerals for $7.3 billion in 2011 and subsequently took a write-down of $4.2 billion for its struggling Lumwana copper mine in Zambia. Why a company that’s valued in the marketplace for its leverage to gold prices would buy a copper producer is hard to fathom. Not to be outdone, Kinross acquired the Tasiast mine in Mauritania as part of the purchase of Red Back Mining in 2010. Total cost: a cool $8 billion. Total write-down (to date): a not so cool $5.5 billion.
Perhaps an even worse fiasco for Barrick is its much touted bi-national Pascua Lama gold project on the Chile-Argentina border. The company put the brakes on at Pascua Lama after national economic policy froze international currency flows and stricter environmental policy such as the Argentine National Glacier Protection Law set limits on what can and cannot be mined. Xstrata, which also has heavy exposure to Argentina, is taking a hard look at two copper projects there, El Pachón (which is also on the Argentine-Chilean border) and Agua Rica, both of which constitute an estimated investment of around $5.5 billion.
This cautious approach by Xstrata -and other mining companies for that matter – reflects concern over some bizarre economic policies that Argentina has adopted under its president, Cristina Fernandez. In 2012, her government imposed onerous new regulations on mining companies, requiring them to present plans to replace imports with goods manufactured in Argentina which the government says is intended to promote national industries. Xstrata currently operates the Alumbrera copper mine in Argentina and hopes to boost copper production by over 60% from existing mines and projects by 2015. But that may be wishful thinking.
Most investors in mining equities have been through a few of these cycles and they have all basically played out the same. Mining executives, most of them smart people, get caught up in the euphoria associated with escalating metal prices and profits. They purchase assets and commit resources to new production at the top of the cycle just when commodity prices begin to peak. Prices tumble and the market gets saturated with new production, depressing prices even further. Burdened with debt, they cut back expenses and fail to take advantage of investment opportunities at the bottom of the cycle rather than the top.
One company, however, that has largely been the exception to this rule is Teck Mining which has grown into a diversified mining company with interests in copper, steelmaking coal, zinc and energy- largely through acquisitions. One of its sweetest deals was the acquisition of its coal assets in southeastern British Columbia in the 1980s – right at the bottom of a commodities cycle and at fire sale prices. But as they say –and some people need to learn- “Timing is everything.”