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Feb 12, 2016

Mayne: major miners join the write-down club as Cochlear soars

Mining companies have been thoroughly inconsistent on the write-downs question this season.



Mining giant Rio Tinto joined the write-downs club in a major way last night when it revealed a disappointing US$866 million net loss for 2015.

Unfortunately, we’re yet to see how that has impacted on management bonuses because Rio Tinto has remained one of those companies that is not releasing its remuneration report with the full-year result.

Of the so-called “naughty nineCrikey named in January, so far we’ve had a change of heart from Iluka Resources and CIMIC Group (the old Leighton Holdings), which have decided to bring forward the release of their remuneration reports to February.

The likes of Melbourne IT, Alumina, Coca-Cola Amatil and Adelaide Brighton have been in touch to say they won’t be changing this year but will look at the matter in 2017.

The most interesting element of the reporting season so far has been balance sheet write-downs, which has highlighted just how different the market’s assessment of net assets can be with a company’s own audited book value.

Bionic ear implant company Cochlear blew everyone away with a boom result yesterday that achieved a first on our market: never before has the market value of an ASX 50 company risen by more in one day than its entire book value.

Cochlear has 57.2 million shares on issue, yet only values these at $7.25 per share in its accounts — or a total of $415 million.

After revealing a 32% jump in half-year earnings to a record $94 million, investors piled into the stock, pushing it up $12.87 to a record high of $104.05. This one-day 14.12% leap sent the company’s market capitalisation soaring by $750 million from $5.2 billion to $5.95 billion.

Under Australia’s historical-cost accounting rules, Cochlear is not allowed to write-up the value of its assets unless it sells them. This leaves it with Australia’s most under-done balance sheet, reflecting only 7% of the market’s value.

There are many companies that trade at double or even triple book assets. ASX itself is a good example, with net assets of $3.78 billion and a market cap of $7.65 billion.

Transurban is an unusual example because it has only been around for 20 years and manages old-world tollroad assets while reporting modest accounting profits.

One reason Transurban’s market cap of $21.8 billion is more than triple its $6.63 billion book value is because value is not being drained away by corporate tax payments.

James Packer complained bitterly about Transurban’s tax-preferred position at last year’s Crown Resorts AGM, and this was borne out again yesterday when Transurban revealed it enjoyed a $9 million tax credit in the latest half year (see page 16).

Amazingly, this went largely unreported in today’s major newspapers, even as the ATO was launching another broadside against major corporate tax avoidance.

When it comes to write-downs there are a number of other issuers that declined to take any, even when their market cap is struggling to stay about their own declared net assets.

After today’s sell-off, Suncorp could very well be trading at a minor discount to its book value of $13.45 billion, a legacy of some high-priced acquisitions in the past, such as Promina. There is no such problem for our most valuable company, CBA, which is valued by investors at $127 billion but claims to have net assets worth just $59.8 billion. This $67 billion market premium is the biggest on the ASX.

Sometimes you get a sense that write-downs have been too aggressive, a tactic that is commonly associated with new CEOs who want to “clear the decks” and paint their predecessor black.

AGL is the latest example as CEO Andrew Vesey this week unveiled a statutory loss of $449 million for the half year after booking one-off significant items totalling $818 million, which was mainly associated with the exit from coal seam gas.

With a healthy market cap of $12.5 billion, it does seem counter-intuitive that AGL has written down its net assets from $8.8 billion to $8.1 billion over the past six months. How that impacts on Vesey’s 2015-16 bonuses will be an interesting issue for shareholders at the AGM later this year.

While Woodside and BHP Billiton were out early putting numbers on specific write-downs that will be formally reported later this month, it is Origin Energy that perhaps has the most work to do.

In Crikey’s January 28 edition, it was pointed out that Origin should be booking huge write-downs, seeing as its claimed net assets of $14.2 billion was double its then market capitalisation of $7.1 billion.

Since then, Origin’s market value has declined further to $6.4 billion and the company released a production report, which included the following comment:

“Origin is reviewing the carrying values of its assets as part of the usual processes for the preparation of its financial statements and will announce any impact on carrying values of assets upon finalisation of the review.”

When it comes, it should be big — and the same applies to Santos, which now has a market cap of $5.3 billion versus claimed net assets of $9.7 billion.

Mining companies have been thoroughly inconsistent on the write-downs question this season.

As Crikey noted on Monday, the Mark Vaile-chaired Whitehaven Coal seems almost deluded as it refused to take any write-downs despite the share price now sitting at less than 15% of the claimed net assets (38 cents vs $2.78).

Oz Minerals took a similar line, claiming to have net assets of $2.34 billion, even though the market capitalisation was down near $1 billion. Unlike Whitehaven, at least OZ Minerals delivered a strong $130 million half-year net profit, which sent its shares up in a falling market.

The Rio Tinto write-downs yesterday were necessary as the company has reduced its claimed net assets from US$54.6 billion 12 months ago to just US$44.13 billion (A$62.7 billion) after the latest loss.

With a market cap of $71.25 billion after Rio Tinto shares tumbled a further 3.3% on the opening this morning, the mining giant was getting close to trading at a discount to book value.

The same applies to BHP Billiton, which foreshadowed the biggest single write-down in Australian history with this brief statement on January 15 detailing a US$7.2 billion impairment to its US on-shore oil assets.

This will certainly be needed as BHP Billiton is today clearly trading at a discount to its August 2015 claimed net assets of $92 billion.


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