Movers & Shakers in Mining

January 28th, 2016 by

The near-collapse (knock on wood) of the global resource mining industry has thrown a wrench in the operations mining companies, investors, not to mention a number of economies around the world. At the same time, this has opened up opportunities for different business models and forced firms to consider new strategies.

Jobs Cuts in South Africa

mining-1015481_640One of the surest signs that current business models for the big miners are struggling is the reduction of the workforce that has been spreading across the mining industry. This trend is not merely led by new technology, but also by the crumbling finances of the employers.

South Africa, long the locus of the mining industry, has has been forced to bear the brunt of the commodities rout. Mining accounts for half of the country’s exports and employs 440,000 workers. The country’s Mineral Resources Minister announced that some 32,000 jobs are expected to be cut from across the industry this year.

Amid regulatory hurdles and increasingly scarce access to reliable power, South African miners have no choice but to downsize in order to weather the storm.

Rio Tinto Sells Assets

open_pit_miningRio Tinto (NYSE, LON:RIO) is a mining giant, with a market cap just shy of $100 billion. The company’s value surged from about $20 per share a decade ago to nearly $140/share in the run-up to the financial crisis. It has been trapped in a downward trend for about the past 5 years. The London-based conglomerate, rather than simply cutting its workforce, is selling off some of its operations to stem the losses.

RIO recently sold its Mount Pleasant thermal coal operations to an Australian firm for $225 million. Some royalty agreement may stay in place, though. This comes just four months after the company shed its stake in an Indonesian coal mine for over $600 million. In total, RIO has divested a staggering $4.7 billion since the beginning of 2013.

Resilient Newmont

Not all of the majors in the industry are in such bad shape, however. Newmont Mining (NYSE, SWX:NEM; TSX:NMC) is another key player in the industry, on par (in terms of market cap) with Barrick Gold (NYSE, TSX, SWX:ABX). Rather than cutting costs or selling assets alone, Newmont has balanced both of these initiatives in order to improve its position in the market.

The firm has sold off assets that don’t pertain to its core business, generating $1.7 billion from these sales. This extra cash was used to help pay down the company’s outstanding debt, which is an important move when all indications point toward a long period of unfavorable market conditions.

Newmont shares rising over last week. Source: Google Finance

Newmont shares rising over last week. Source: Google Finance

Even more importantly, Newmont has slashed its average costs of operation. In 2013, the company’s all-in sustaining costs (AISC) for mining gold were $1,104/oz—not bad when the gold price was between $1,300/oz and $1,400/oz. This was trimmed to $1,031/oz the following year, but the big leap came in 2015: all-in sustaining costs were reduced by 16% to just $864/oz. This means that Newmont can keep its mines open for business so long as gold prices don’t fall below its AISC.

Broader Picture

The worldwide rout for commodities and the related struggles of the Chinese economy have crushed the vast majority of the mining industry. (Perhaps the only part of the economy hurting worse than resource mining are energy companies.) Not many big miners have been able to hunker down and improve their position the same way Newmont has.

Gold NuggetThe global market for raw materials is inherently cyclical: think about how the current long downturn followed a long period of surging prices during the highly inflationary financial crisis. So, what we’re seeing right now is volatile, to be sure, but hardly out of the ordinary for commodities markets.

Nonetheless, this downturn has been swift in arriving (recall: Summer 2014) and doesn’t appear to be changing anytime soon.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.