[miningmx.com] – CANADA’S Metals Economic Group (MEG) reported
earlier this week that the global mining sector appeared sanguine about a reduction in
the rate of growth in China and distress in the Eurozone. This, it said, was based on
only a 4% year-on-year decline in acquisitions, which totalled $47.4bn.
But as BHP Billiton CEO, Marius Kloppers demonstrated on Tuesday in a
presentation to the Bank of America Merrill Lynch Global Metals, Mining & Steel
conference, world economic conditions have changed between 2011 and now.
As a result, the most burning issue has become capital allocation. Acquisitions and
project financing are bound to slow in the coming years because, “… we have more
projects than cash flow,” as Kloppers described the weakening in metals prices, and
likely further weakening.
Simultaneously, companies like BHP Billiton have dividend yield and credit ratings to
protect. Already, the company has said last year’s $80bn capital expenditure
projection for 2012 would not materialise. “The projected rate of cash generation has
changed. Our ability to do projects will change,” Kloppers said.
The upside of having a surfeit of projects for BHP Billiton is that it can pick and choose
where best the returns lie from projects anywhere in its portfolio anywhere in the
world.
As UK stockbroker Fairfax commented in a note on Wednesday: “Majors were competing with
each other on their project pipelines but now they are competing to see who can best
conserve capital.
“What is critical now is how much capital is firmly committed and how much can be
held back to weather the forthcoming financial storm”.
In a speech to the Australian Institute of Company Directors earlier on Wednesday,
BHP Billiton’s chairman, Jac Nasser, spelled out Kloppers’ message further: “Given our
range of options, if we can’t meet our criteria in any one project, product or
geography, we will redirect our capital somewhere else or we simply won’t invest at
all”.
One wonders if the South African government is taking any of this in? Having been
late to the party in resource nationalism, the
ANC’s State Intervention in the Mining Sector,
or Sims, is recommending a resource rent tax at exactly a time when the likes of BHP
Billiton are saying such policies will now deter investment.
Said Nasser: “[So] we need to look at today’s costs, taxes, economic conditions and
where we are in the cycle and think about where these could be heading. We have to
think about taxing away future returns and consequently capping future investments
and opportunity”.
Nasser was directing his comments primarily at the Australian government having
earlier in his speech said “… the level of uncertainty about Australia’s tax system
[was] generating negative investor reaction”, but the observation is equally relevant
to South Africa.
Bear in mind, BHP Billiton has not hesitated to divest from Southern Africa, and South
Africa in particular, when the returns don’t stack up having quit its investments in the
Koornfontein and Optimum coal mines, Samancor Chrome, Pering, Zululand Anthracite
Colliery and, most recently, Richards Bay Minerals.
Mines minister, Susan Shabangu, has commented that Sims, a report produced one
suspects as a palliative to those seeking nationalisation of the mining industry, won’t
greatly affect proposed changes MPRDA amendments.
“We won’t create tax burdens that will make our mining industry uncompetitive,’ she
said at the mineral resources department’s budget vote last week. “No country is ever
happy with its own tax systems, but ours compare well and seem to be competitive,’
she added.
But as Bheki Sibiya, Chamber of Mines of SA CEO observed at the Coaltrans
conference last week, such is the ANC democratic processes, that anything can be
proposed from the floor. This means even nationalisation can get a hearing at the ANC
policy-making conference in June. One hopes this can be debated and dispatched with
speed, along with the 50% resource rent tax on super profits contained in Sims.
