Anglo joins litany of billion dollar write-downs

[miningmx.com] – THE decline in commodity prices have hurt mining and resources companies in the past 18 month.

One of the more obvious demonstrations of this pain, apart from share prices and net profit figures, is the carrying value of a mining company’s asset base which, in financial-speak, is called an impairment or write-down.

In some cases, this is simply money down the toilet; most of the time, it’s a valuable reminder that the mining industry was, is and will always be, a cyclical business and investors need to be defensive in their investments.

In nearly all cases, when markets go bad, the CEOs take a bath. Here’s Miningmx’s take on the worse write-downs of the cyclical downturn.

$14bn

Company:Rio Tinto

CEO:Tom Albanese

Status:Sacked

Morbid Details: Albanese was dismissed from Rio Tinto with immediate effect but has to tread the carpeted offices of the Anglo-Australian firm until july 16, enough time to handover to replacement, the 63-year old Sam Walsh.

He also loses all his bonuses from 2011 onwards, the sign of a “bad leaver’, in the words of one UK analyst Miningmx spoke to..

The $10bn to $11bn write-down on Rio Tinto Alcan (RTA) was largely expected, and had been flagged by the company. But it was the $3bn impairment at Rio Tinto Coal Mozambique (RTCM) that delivered the hammer blow to Albanese’s six-year reign as CEO.

The asset, bought less than two years ago from Riversdale Mining for $4bn, will produce less coal than expected; worse, a plan to barge the coal down Mozambique’s Zambezi river was not approved by the Mozambican authorities leaving Rio Tinto with the massive headache of building a multi-billion dollar railway connecting its far-flung Tete province mine with the nearest possible port.

$4bn

Company:Anglo American

CEO:Cynthia Carroll

Status:Resigned

Morbid Details: The UK’s Sunday Times’ speculation on January 20 that Anglo American would impair as much as $5bn in its year-end results came partially true as the group said it would write-down Minas Rio, its Brazilian iron ore mine, by $4bn.

There may yet be impairments that relate to Anglo American Platinum (Amplats), including some assets not currently in use, but which are not feasible in the current market.
The biggest pain felt by Anglo shareholders, however, is the Minas Rio iron ore mine, a project slapped with a freight-load of injunctions by Brazilian authorities.

Eventually a detailed cost review in November led to a ballooning in capital to $8bn taking total investment in mine, including acquisition price, to $14bn.

Initial capex estimates were $5bn. It gets way uglier though – the slippage in schedule means Anglo will be competing for construction materials and skills at a time when Brazil is building for the Fifa World Cup and then, two years later, the Olympics.

Even when production comes on line, it’s thought a new generation of iron ore mine mines, including expansions, will already have come on line.

$3.3bn

Company:BHP Billiton

CEO:Marius Kloppers

Status:Holds position but board initiates search for new CEO

Morbid Details: Marius Kloppers decide to act before being acted upon. On realising that the group’s US-based Fayetteville shale gas assets would be written down by sme $2.8bn in August, the South African executive asked not to be considered for a year-end bonus.

He was joined in his sacrifice by Mike Yeager, head of BHP Billiton’s petroleum division. In addition, BHP Billiton also wrote down its Australian nickel assets for some $450m.

$514m

Company:Xstrata

CEO:Mick Davis

Status:Leaving company 6 months after Glencore Xstrata is created

Morbid Details: The impairment charge was taken against Xstrata’s 24.6% stake in platinum producer, Lonmin – an investment Mick Davis, the departing CEO of Xstrata, once described as his biggest mistake.

It was one he was prepared to fix, announcing in November that Lonmin’s had been asked to consider a reverse takeover by Xstrata’s chrome and platinum division.

Lonmin declined but the firm’s future management remains on tenterhooks as it, firstly, seeks a long-term CEO and, secondly, wonders whether Davis will try to tidy up perhaps his one major mess-up before heading off into the sunset following the $33bn merger of his beloved Xstrata with Ivan Glasenberg’s Glencore.

Box: What’s a write-down?

A write-down is when a company recognises the book value of a certain asset is in excess of its market value.

As a result, it marks down the carrying value of the asset on its books. It’s not all bad. Write-downs occur on the income statement before net profit so although they are non-cash items, they lower tax payable.
Companies are also rather crafty about their write-downs: they time especially large write-down so that the take all the pain in one go and then return to health in the following period.