Poor quarterly results released overnight by a trio of miners from the US and Canada contained clear warning signs for the likes of BHP Billiton and Rio Tinto as they prepare to report their full-year (BHP) and half-year (Rio) results next month. Adding to the pressure on the big two is news that global iron ore prices fell to nine-month lows earlier this week.
That is going to affect the outlook for the two giants, as well as the rest of the industry. Reuters and the Financial Times reported that the spit price (for ore of 62% Fe delivered to north China) fell to $US119.70 a tonne, the first time it has been under $US120 a tonne since last October.
And early this morning, Sydney time, Vale, the world’s second biggest miner, added to expectations about BHP and Rio’s results with news that it saw a sharp, near 60% plunge in June quarter profits.
Vale blamed lower prices for iron ore and nickel, as well as accounting effects related to the Brazilian real’s sharp fall against the US dollar.
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Vale, which is the world’s largest producer and exporter of iron ore and iron pellets, reported a second-quarter net profit of $US2.66 billion, down more than 58% from $6.5 billion in the same quarter a year ago. That was after a 21% slump in revenues to $US12.2 billion. Vale is also the world’s second-largest nickel producer.
Vale said second-quarter profits “suffered a large accounting non-cash balance sheet impact arising from the devaluation of the Brazilian real, our functional currency for accounting purposes, against the US dollar.”
The foreign-exchange volatility shaved about $US1.7 billion from Vale’s net profit compared with a $US427 million gain in the first quarter. Without the foreign-exchange related accounting impact, Vale said it would have registered a net profit of $US3.97 billion in the three months to June, which would have been a fall of 49% from a year earlier..
Earnings before interest, tax, depreciation and amortisation (EBITDA), which is a more accurate way of looking at the profitability of a company’s operations, especially miners such as Vale, told the story with a 39% plunge from the June quarter of 2011. Value said EBITDA fell to $US5.496 billion in the June 2012 quarter from $US9.069 billion.
The impact of the fall in coal, iron ore and metal prices (and in the case of BHP, oil and gas prices in the June quarter) will push the profits of the world’s biggest and third largest miners down by 20% or more. Judging by the release of results overnight from the Canadian giant Teck Corp, Peabody, the big US coal miner and Cliffs Resources, a smaller miner. That 20% forecast could be on the light side. Certainly the outlook for the six months to December will have to be cut following comments from some of these groups.
Playing a big part in the lower results is the natural fall in coal and iron ore prices from the June half of 20112, which were boosted by cyclones and flooding in Australia (Queensland in the case of coal), and by bad weather in Brazil (iron ore), Colombia and Indonesia (both coal). Prices have fallen sharply from their record highs, with thermal coal prices now $US80-$US90 a tonne, half the level of some spot sales 15 months ago and down on the 2012-13 contract prices of about $US105 a tonne. Metallurgical coal prices have fallen to about $US200 a tonne, from more than $US280 a tonne and iron ore prices have dropped from more than $US180 a tonne to close to $US120 a tonne.
Peabody, which late last year paid $5 billion for Macarthur Coal in Queensland, reported a 30% fall in operating profit to just over $US215 million (from $US307.8 million in the second quarter of 2011). The company blamed the costs of the Macarthur takeover, lower coal prices in Australia, the impact of higher operating costs and the downward pressure in the US from cheap gas prices, which is hurting demand for thermal coal.
And the company cut its third-quarter profit outlook by up to $US100 million because of the continuing weakness in pricing for thermal and metallurgical coal. It also cut production guidance by 2 million tonnes because of poor productivity and low prices (that’s a loss of more than $200 million of revenue). But in all the reasons trotted out by the company for the downgrades — the poor productivity, the carbon tax in Australia, weak prices and demand — Peabody failed to mention the biggest factor: it paid too much for Macarthur Coal.
Peabody’s share price has plunged 42% this year as coal prices have fallen in export and US and Australian markets. That’s been caused by the slowdown in the US, Europe and China and the way coal demand is falling because more US consumers, especially in the power industry, are switching to cheaper gas produced by fracking from tight shale. In fact, at the close this morning on Wall Street, Peabody’s total value was $5.6 billion.
That means Peabody’s other coal mines and its huge operations in the US and other countries are valued at just $US600 million. It borrowed over $US2.7 billion to finance the Macarthur purchase. The higher interest cost for the Macarthur purchase is hurting Peabody and is a far greater burden than the carbon tax in Australia.
But the results from Teck, Canadian’s biggest miner (17% controlled by a state-owned group, China Investment Company, part of a sovereign wealth fund) confirm the worsening state of global mining. The group reported a 64% plunge in second-quarter profits. Profit fell to $C312 million, from $C663 million in the second quarter of last year.
Teck is a major producer of metallurgical coal, copper and zinc and has been rumoured to be a buyer of shares in Fortescue Metals, Australia’s third biggest iron ore exporter. The profit fall came despite record copper production in the quarter and higher coal sales. But the slide in commodity prices in the three months slashed revenues by 14% and profit margins by even more.
And in the US, Cliffs Natural Resources reported its second-quarter profit fell 37% to $US258 million from $US409 million in the June quarter of 2011. Revenue for the quarter fell 10% to $US1.63 billion from $US1.81 billion for the Cleveland-based iron ore and metallurgical coal-mining company would earn $1.77 a share on $1.76 billion in revenue. The shares have fallen 58% over the past 12 months. Cliffs has two small iron ore mines in WA and a 45% stake in a metallurgical coal project in Queensland.