Monday, 12 October 2015

Glencore's potential sale of copper assets highlights the distress in copper mining

Glencore announced that two of its copper mines are up for sale following management's plans to reduce debt by a third to curb cash flow leakages from its balance sheet as it grapples with a downturn in commodity prices. Glencore is the largest producer of the red metal making up 28% of earnings.

The move could be indicative that the company isn't optimistic about the price of copper over the long term setting up fears that the commodities boom the world saw pre-financial crisis could be over with Chinese growth shrinking to half of what it was fuelling concerns that there may be deeper economic troubles bothering the transitive nation.
Major competitor BHP Billiton who announced a surprise demerger late last year by separating riskier assets from quality ones were already signs of distress in the mining industry. I think you have to weigh in on the argument that if the world's largest diversified mining company is implementing corporate strategies such as these after a brief period of talking up the prospects of value to be tapped into from China, you don't feel the same confidence that was exuded in past statements made by the company and they more happy to deliver returns to shareholders in the least riskiest way.

One project that the company has been working on is Olympic Dam in South Australia when the company bought the mine from previous owners with intentions to expand the resource rich soils into job opportunities from the boom. Given the amount of capital outlay so far it doesn't seem as if the project will see it's full potential.

A recent interview with Jacqui McGill, President of Assets about new developments around the extraction of ore using a process known as heap leaching. The minerals are placed in an area where chemicals are dripped over them and through time minerals such as copper, uranium, silver and gold are separated. It should be noted that the company is still trialling the process out in an effort to ascertain if it is a cost effective way to extract minerals.

Most of the revenue generated from Olympic Dam is copper so it would be safe to assume that the company is finding ways to cut costs, something that is familiar with job creations with labour cost the first target of reductions.  It does paint a grim picture for the outlook of the red metal but I'm confident that demand will begin to push upwards again once the glut in the market has been cleared however how long that takes depends on the level of economic activity not only in China but the rest of the world which doesn't look good right now.

Let us not forget the other significant player in the field of copper, Anglo American who last month disposed of its Chilean copper business Norte also in an effort to concentrate on value driven business that can produce the goods for shareholders. Mark Cutifani who took the reins over from Cynthia Carroll has been hard at work reshaping the way the business goes about its operations.  It hasn't much won much favour with the share price of late but longer term there does appear to have silver linings.

If we had to conclude what our assessment of the copper mining industry we could say that the red metals prominence in economic expansion and liberation of  previously inactive economic participants drove prices to the highs but that same demand has dried up leaving mining conglomerates in a tight spot which is a concerns not only for the hopes of a Chinese recovery but also the optimism for world growth in the future.
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