BHP, Rio Tinto Hold Off Iron Ore’s Squeeze

Back in August 2012 when I came back from Australia, I blogged how Aussie was going to head for a slump due to China cooling and individuals in the Mining industry telling me they saw a halt in the demand. Well, the slump is well and truly here; however, some of the miners stayed out of trouble by not paying crazy prices for the mining pits. Furthermore, they sold off assets like railway lines. I fondly recall sitting with a hedge fund guy in Naples that told me he was buying the debt for Aussie mining railways. He was very happy that the demand was there into the future backed by Chinese contracts. I shared with him where I thought demand was going and the issue with enforcement of Chinese contracts, he told me I was full of S---! I wonder how much money he has lost? I do thank him though as he was one of the reasons that spurred me into creating and maintaining a blog looking into the future using my previous experiences. Aivars Lode

By Rhiannon Hoyle

SYDNEY—The world’s largest iron-ore mining companies have much in common with Big Oil right now: Each sector is grappling with slumping commodity prices cutting deeply into their financial results.

What some of the mining companies don’t share with the oil majors, though, are big write-offs on their assets.

While several oil companies took billions of dollars of impairment charges in their 2014 earnings, mining companies such as BHP Billiton and Rio Tinto have escaped writing down the value of iron-ore pits in Australia.

Vale SA, the world’s largest iron-ore producer, on Thursday posted a fourth-quarter net loss of $1.85 billion and wrote off $635 million on an iron-ore project in Guinea. Brazil-based Vale attributed the charge not to iron-ore prices, but to “uncertainties” regarding potential compensation for its investments in the concession, which the Guinean government revoked last year.

 By contrast, British oil company BG PLC wrote off US$8.9 billion against its assets, including a liquefied-natural-gas plant in Australia. BP PLC, also based in the U.K., wrote off $3.6 billion, primarily on its upstream, oil-producing assets, while Total SA of France took a $6.5 billion charge against some of its shale and oil-sands ventures.

Both iron ore and crude oil halved in value last year amid emerging supply gluts. 

But the mining companies’ profits haven’t taken such a large hit, partly thanks to timing, and partly because their low-cost mines remain handily profitable despite iron ore’s slump. 

By contrast, many sizable oil companies have made large investments in recent years in projects that need oil prices far higher than their current level to break even. 

The mining companies “haven’t paid for the sort of growth oil majors have, in an environment where prices were as high as they have been in the past couple of years,” said Mike Elliott, global mining and metals leader at professional services group EY.

“For a lot of these oil majors, though, they acquired properties when the oil price was above $40 or $50 a barrel. That means when you come back to $50 a barrel you are exposed,” he said.

The divergence in fortunes has its roots in iron ore’s rapid rise from an unloved commodity to an important profit engine for BHP and Rio Tinto, largely because of the rapid urbanization in China, where iron ore is used to make steel for things as diverse as cars and apartment buildings. 

BHP and Rio staked out vast tracts of the Australian Outback more than a decade ago when iron-ore prices were a fraction of current levels. As a result, mining companies’ balance sheets weren’t saddled with assets bought when prices were high. 

In 2000, when Rio Tinto acquired North Ltd. for $3.5 billion to become the world’s No. 2 iron-ore producer, the commodity was trading at roughly $20 a ton. The ore’s price eventually rose as high as $190 a ton in 2011. Despite its recent slide, it still trades at $65 a ton. 

Also, BHP and Rio Tinto had existing infrastructure such as ports and rail networks in place that allowed them to keep costs in check when expanding their Australian mining operations. 

That allowed them to sidestep massive paper losses faced by rivals such as Anglo American PLC, which has been forced to take hefty impairment charges in recent years after the cost of a iron-ore mine it has built in Brazil grew to more than triple its original budget.

“In mining, the holes in the ground are relatively low-cost—building your rail and port infrastructure are the big-ticket items,” said Melbourne-based Pengana Capital fund manager Tim Schroeders. “For BHP and Rio, they were in early and did that at an order of magnitude below the others.”