Industry Trend Analysis - Big Five Miners Strategy: Crib Sheet - JULY 2014

BMI View: C ost-cutting in the global mining sector will continue over 2014-2016 as major miners come under pressure in a post commodity price boom environment. Below, we highlight the key growth strateg ies of the major global miners: Anglo American, Glencore Xstrata, BHP Billiton , Rio Tinto and Vale .

Key Takeaways:

  • The austerity push in the mining space will continue over 2014-2016, as major miners focus on the development of brownfield assets over greenfield development. According to Bloomberg consensus, the capex of the top 10 miners will fall from USD102bn in 2013 to USD96.5bn in 2014 and USD80.5bn by 2015.

  • Compared with the juniors, major diversified miners are less exposed to the mining downturn due to their lower cash costs, economies of scale and diversified investment portfolio.

  • Iron ore, coal and copper are the key growth pillars for miners. As illustrated by Rio Tinto's (Rio) aggressive expansion plans, boosting volumes will be a key strategy to shore up profitability in the face of falling prices.

  • Anglo American and BHP Billiton (BHP) are pursuing further divestment, while Glencore Xstrata will continue its diversification drive.

Major Iron Ore Miners To Continue Outperformance
Select Equities & Index, Rebased

Anglo American: Iron Ore & Met Coal To Drive Growth

We expect Anglo American to face a rocky road over the coming quarters as the company looks to restructure its operations in the face of weaker global commodity prices. Anglo American plans to slash capital expenditure over coming quarters and divest of non-core assets, while it presses ahead with strategic expansion projects. Sixteen of the company's sixty-nine assets have been earmarked as potentials for divestment. Anglo American's total capital expenditure (capex) for 2014 is expected to be USD7.1bn, falling to USD5.7bn in 2015 and USD4.7bn in 2016.

The future of Anglo American's platinum segment, Amplats, is increasingly tenuous. Strike action which crippled production over Q1-Q214 could prove to be the last straw for Anglo American; the company's CEO has suggested that it could sell its South African platinum assets.

Capex will be primarily focused on several key new projects. In the iron ore segment, the reconfiguration and redesign of Sishen in South Africa will help the company to achieve its 35mnt target this year. In Brazil, the construction of Anglo's new iron ore mine, Minas Rio, is on target and within budget. In the metallurgical coal segment, the Grosvenor project in Australia is expected to come online in 2016.

Heavily Exposed To South Africa
Anglo American - Revenue By Geography, 2013

BHP Billiton: All About Portfolio Simplification

BHP's diversified portfolio of large, long life and low-cost assets across various commodities and geographies will provide a firm platform for future growth. The miner is pushing for a continued simplification of its portfolio in an effort to boost shareholders' returns. Specifically, it may look to unload almost all of its non-core units (at around USD10bn) acquired from the merger with Billiton in 2001. BHP will focus on the development of its five big resource basins in the coming quarters, namely, the coking coal and iron ore projects in Australia, the oil and gas assets in the US and Gulf of Mexico, as well as the giant Escondida copper mine in Chile.

We believe BHP's relentless focus on brownfield assets is a boon to the miner's growth prospects. The inherently lower risk nature of brownfield projects will minimise the risk of wasteful cash burns on ore bodies which ultimately turn out to be economically unviable.

Diversification A Boon
BHP Billiton - Revenue by Destination & Product Segment (2013)

Rio Tinto: Betting Big On Iron Ore Volumes In Australia

Rio will focus on debt reduction and the divestment of non-core assets by reducing its capex from USD12.9bn in 2013 to USD8.0bn by 2015. Crucially, the miner's push to improve its already low-cost sitting in the global iron ore cost curve will continue to support profit margins despite lower prices in the coming years. Rio, which derived 85% of its net income from iron ore in FY2013, is on track to boost production in the Pilbara region from 290mn tonnes in 2014 to 350mnt in 2017. An additional 100mnt from the USD20bn Simandou project in Guinea will come online once fully operational.

Capex Cutbacks Intensify, But Still Embracing Iron Ore
Rio Tinto - Capex (USDbn, LHS) & Net Income by Segment (2013, RHS)

Nonetheless, we do not expect Simandou to achieve its target date for commercial production in 2018. Financing issues and infrastructure challenges are major roadblocks. In order to export the mined output from the remote Simandou South concession to Guinea's Atlantic coast, a 650km railway at an estimated cost of USD7.0bn will have to be constructed through the West African jungle. Additionally, it requires the construction of a USD4.0bn deep-water port at Morebaya, along with supporting infrastructure at a minimum cost of USD2.5bn.

Tough Road To Simandou Riches
Guinea - Simandou Mine & Proposed Railway

Vale: Persist ent Tight Grip On Iron Ore

We expect Vale will remain the world's largest producer of iron ore over the next five years due to its renewed focus on core mining operations. With 75% of its 2013 revenue derived from iron ore, Vale is expanding output at its Brazilian assets, aiming to lower its per-unit costs and maximize its global market share. By 2018, the firm is aiming for iron ore output of 450mnt, up from 306mnt in 2013, primarily driven by its S11D iron ore project which is scheduled to produce 90mnt a year by 2018. Further to this strategy, the firm sold off noncore assets worth approximately USD6bn in 2013, and continues to focus on operational efficiency and cost cutting to maintain margins and strengthen its balance sheet.

China & Iron Ore To Remain Name Of The Game
Vale - Revenue By Destination (LHS) & Revenue By Segment (RHS), USDbn

Despite its market-leading status and solid financial position, Vale will face challenges in the years ahead. Continued weakness in iron ore prices will put pressure on margins and overall profitability, and increase the likelihood the firm will cut its dividend, putting further downward pressure on its share price. Moreover, despite total cuts to capex in recent years, from a high of USD18bn in 2011 to a forecasted USD13.8bn in 2014, the firm's expansion plans will require significant capex at a time of subdued iron ore prices, increasing the likelihood the firm's debt levels will rise and free cash flow will fall. According to market consensus, Vale's total capex from 2014-2016 will remain second only to BHP. On the operational side, we believe Brazil's shifting regulatory environment and complex tax structure, most recently exemplified in Vale's ongoing legal dispute with the Brazilian government over taxes owed on foreign subsidiaries, puts the firm at a disadvantage to its Australian peers.

Past Its Prime
Vale - Quarterly Capital Expenditure, USDmn

Glencore: Diversification Drive

Glencore will pursue a different strategy to the other major miners through its plans for diversification into non-mining segments. Glencore's CEO, Ivan Glasenberg, cited the firm's combination of mining and commodities trading as its key advantage over its competitors. From Glencore's perspective, presence in the trading business allows the firm to understand the performance of markets before the other mining companies.

Moreover, in April 2014 Glencore purchased African-focused oil producer Caracal Energy, hours after divesting of the Las Bambas copper mine in Peru. This shift highlights the firm's changing focus toward the energy sector and its diversification away from mining. In 2013, Glencore derived 60% of revenue from energy products and 27% from metals and minerals. This compares to 49% from energy products and 38% from metals and minerals in 2011.

Since the firm's merger with Xstrata, Glencore has sought to rapidly divest of Xstrata's unprofitable assets. This strategy will continue to be pursued as Glencore looks to slash capital expenditure, which is similar to the strategy of the other major miners. We expect Glencore's 25% stake in troubled South African platinum producer, Lonmin, to be high on the list of assets up for sale. Glencore's Tampakan Copper-Gold project in the Philippines is also likely to be divested over the coming months.

Despite weak coal prices, Glencore remains committed to its coal operations in Australia. The company will also focus on copper due to the dearth of large-scale new copper projects set to come online and declining ore grades globally.

Diversified Into Energy
Glencore - Revenue by Product Segment (2013)
Major Miners - Key Growth Strategies
Rio Tinto BHP Billiton Anglo American Vale Glencore
Capex Cut from USD12.9bn in 2013 to USD11bn in 2014 and USD8.0bn by 2015 Decline from USD21.5bn in 2013 to USD16.0bn in 2014 and USD13.8bn in 2015 Growing from USD6.1bn in 2013 to USD7.1bn in 2014. Falling to USD5.7bn in 2015. Capex to decline from 13.3bn in 2013 to 13.1bn in 2014. Growing to 13.5bn in 2015. Reducing capex from USD9.6bn in 2013 to USD8.7bn in 2014, to USD6.6bn in 2015.
Commodity Focus Iron ore Met coal, iron ore, oil and gas, copper Iron ore, met coal Iron Ore Diversification drive: Oil, trading, coal, copper.
Divestment Plans Not actively seeking to divest assets this year but would consider any attractive offers May unload all its non-core assets acquired from the tie-up with Billiton in 2001 Anglo could look to divest of its platinum operations. Majority of noncore assets sold in 2013 Successfully divested of the giant Las Bambas copper mine in Peru in April 2014. Now, divestment plans consist of a multitude of small assets including the Tampakan Copper-Gold project in the Philippines and Glencore's 25% stake in platinum producer Lonmin.
Key Challenges Simandou project could be delayed due to funding issues and infrastructure shortfalls Efforts to divest could receive lacklustre interests from buyers Labour unrest in South Africa presents a major worry. Greatest exposure to iron ore among major miners; Brazil's tax and regulatory environment remains complex Returning to profit is the major challenge after a massive net loss of USD7.4bn in 2013, compared with a USD1bn profit in 2012. The 2013 loss was partly related to its merger with Xstrata. Glencore has aimed to divest of Xstrata's deadweight assets as quickly as possible.
Note: Capex based on Bloomberg consensus. Source: Company Announcements, BMI, Bloomberg