[miningmx.com] – IT’S been year of flux if you happen to take a seat in
the executive office: CEOs in the mining sector have been particularly vulnerable.
It’s already known that the diversified mining groups Anglo American and Xstrata will
have new leaders in the course of next year once the adieus have been uttered by
Cynthia Carroll and Mick Davis respectively; the latter change owing to the proposed
$33bn merger of Glencore with Xstrata; the former by dint of an ouster, itself rooted
in shareholder dissatisfaction.
That’s only to scratch the surface, however. For instance, there’s been the complete
changing of the guard in South Africa’s platinum sector, with four executives taking
their leave this year: David Brown of Impala Platinum, Stuart Murray at Aquarius
Platinum, Neville Nicolau at Anglo American Platinum (Amplats), and Ian Farmer at
Lonmin, owing to sickness.
And proving that nothing is forever, not even in the diamond business that gave life to
the idiom, Nicky Oppenheimer resigned as chairman of De Beers after his family’s
stake was bought by Carroll’s Anglo American.
Mike Teke, (CEO, Optimum Coal Holdings), Ferdi Dippenaar (CEO, Great Basin Gold),
Stuart Eliott (CEO, Merafe Resources) and Paul Miller (CEO, Keaton Energy) have all
parted ways with their employers this year.
The question is whether there’s more to come before the year is out?
One analyst makes the point that Carroll’s resignation from Anglo American throws
the spotlight on her counterparts – Tom Albanese at Rio Tinto and BHP Billiton’s
Marius Kloppers, all of whom were appointed in 2007, like Carroll. Have they
performed so much better as executives that they should escape the shareholder ire
Carroll copped?
BHP Billiton has let it be known that it is turning its mind to who will succeed
Kloppers. Couched as a demonstration of good governance, the message is really
guidance that investors can expect a change of management in two years, but more
probably sooner.
Says an analyst: “Cynthia has had quite a bad deal in many ways. There’s no doubt
the company’s investment in Minas Rio (an iron ore mine in Brazil) was an
unmitigated cock-up.’ However, Rio Tinto wrote-down $20bn of its investment in
Alcan, a downstream aluminium business, and BHP Billiton lost $1bn after it shut
down its Raventhorpe nickel project in Australia and then sold it for a fraction of its
initial outlay.
Carroll has been lambasted for poor capital allocation – she spent money badly – such
as paying R7.8bn for a near 5% additional in Kumba Iron Ore that was calculated as a
40% premium to Kumba’s future discounted cash flow. But how was this massively
different to Xstrata’s purchase of 24.6% in Lonmin?
In August, Xstrata wrote down the Lonmin investment by $500m, a platinum share
that has since lost 30% and may tap shareholders for $1bn or more before end-
March. Xstrata also spent $1bn on Eland Platinum. This would suggest there’s more
pain to come for Xstrata in respect of its platinum exposure.
“Given the challenges and pressure to the business, it may not come as a surprise to
some, but we believe overall she [Carroll] has done a good job of transforming the
company since taking the helm in 2007,’ said Cailey Barker, an analyst for UK broker
Numis Securities. “In our view, she should leave with her head held high.’
But go she must. The question is: why now, and why has there been so much
executive movement this year?
The answer could partly relate to the almost genetic inefficiency of the extractive
industries sector. The market, especially the large, multi-national end of the mining
industry, pays big dividends or announces share buy-backs when the world’s metal
prices are high; it expands voraciously in search of market share when times are
headily optimistic and abhors a “lazy balance sheet’.
Spending when times are good creates the cyclicality that sees executives get the
hook when the markets turn down. Short-term shareholder panic that may be, but it
happens. If the management of the likes of Rio Tinto and BHP Billiton rejected
progressive dividend strategies and costly protection of credit ratings in preference to
dividend targets, they would almost certainly face getting the boot.
“Ultimately, in such a cyclical industry, there is also perhaps an argument for running
more “lazy’ balance sheets in order to better weather the peaks and troughs of the
inevitable price cycles,’ says Macquarie Research in a recent note. (This conservatism
is, in fact, practised by the oil and gas companies that expend massive amounts on
exploration even if the outcome is the knowledge there’s no oil present.)
“This more conservative funding approach would better position the diversified miners
to truly invest through the cycle which would ultimately improve shareholder returns,’
it said.
– Finweek
