10-year Low Profits for World’s Largest Gold Miner

August 26th, 2015 by

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BHP Billiton (NYSE, ASX:BHP; LON:BLT) from Australia, world’s biggest mining company, slashed its forecast for Chinese steel (iron ore) demand, retreating from what may prove to have been overly bullish projections. The move was seen as unavoidable given that the mining giant’s profits slumped 52%, a 10-year low, over the last year. The year-long rout in commodities certainly hasn’t helped BHP Billiton, which focuses mainly on gold, copper, iron, and coal.

As would be expected, much of the mining sector has followed raw commodity prices lower. BHP Billiton is far from the only firm that’s feeling the pain.

Mining Blues

Shareholders have soured on mining companies ever since the prices of the industrial metals and precious metals began to fall from their peak in 2011. Though the reasoning for holding bullion hasn’t changed, investors have become less apt to hold shares of struggling miners since the metal prices have dropped. The fourth-largest mining company, Fortescue (ASX: FMG), reported an 88% drop in its net income, while another major miner, Rio Tinto (NYSE, LON, ASX: RIO) posted profits during the first half of 2015 that were down 43%.

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The projection cut by BHP Billiton reflects an industry-wide trend of overshooting forecasts for Chinese demand specifically. (China is both the world’s top consumer and top producer of commodities, therefore occupying a central place in the global commodities trade and mining industry.) Thus far, just about everybody has been wrong on how resilient China will be in the years going forward as the Chinese economy undeniably enters a period of slowing down. The country’s economy is set for its weakest growth in a quarter-century. Glencore (LON:GLEN) CEO Ivan Glasenberg, always an outspoken personality, has admitted that it’s been “tricky” to call what’s in store for China.

The future prospects for Minera IRL (LON:MIRL; TSX:IRL) are also taking a hit as corporate in-fighting is placing the company’s new gold mining project in Peru in question. A reshuffling of the company’s executive structure has not sat well with local communities, who have withdrawn their support for the Ollachea project, the site of a huge new operation that is supposed to come on-line in 2017. By many accounts, Minera’s future hinges upon the success of Ollachea. It is estimated that 1 million ounces of gold lie beneath the ground there, and are believed to be a low-cost venture. Unfortunately, unless the concerns of locals are addressed, the Peruvian gold mine will almost assuredly be in peril.

Finding Alternatives

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In an attempt to avoid the fate of their larger counterparts, many junior miners are expanding into other commodities—of note, medical marijuana. Junior miners like Canada’s Supreme Pharmaceuticals (CSNX:SL) have reoriented operations toward farming pot, which became legal for medicinal purposes across Canada last year. Other firms have chosen to expand into foodstuffs and agricultural products as an alternative source of revenue. Australia’s Erin Resources (ASX:ERI) is another company that has pulled back its gold exploration in favor of growing medical marijuana, though the trend has been even stronger across Canada.

This shifting strategy for miners is reminiscent of a similar wave that hit the industry about 15 years ago, when many junior mining companies converted operations into the technology sector in response to the dot-com boom. How long the trend will last depends largely on how soon metal prices rebound.