By Tatyana Shumsky And Timothy Puko
The world's largest mining companies have plenty of nickel. Now
they are scrounging around for nickels.
In a sign of desperation amid plunging commodity prices, mining
companies are delving into low-margin businesses--traditionally the
domain of the industry's middlemen--for new sources of revenue.
Rio Tinto PLC for the first time has started to refine other
companies' copper ore. Brazil's Vale SA, the world's largest
iron-ore producer, has begun mixing minerals to make custom
supplies for buyers. U.S. coal miner Murray Energy Corp. in June
launched its own trading unit.
The mining companies are seeking to alleviate the financial
pressure from tumbling raw-materials prices. With industrial metals
and coal at lows last seen during the financial crisis, the share
prices of many companies have collapsed by more than half in the
past year. A global supply glut and weak demand have spurred the
selloff in futures markets and mining stocks.
Anglo American PLC alone posted a $6 billion loss for the year
ended June 30, compared with a $100 million profit in the previous
period.
"Everybody is trying to find ways to squeeze out whatever they
can," said Rick de los Reyes, who helps manage $1.5 billion
invested in metals and mining at T. Rowe Price. "Everybody is
fighting to stay alive."
The scramble for revenue, no matter how small, is an example of
how producers are grappling with the commodities bust following an
extended boom fueled by China's rapid growth. It is also a tacit
acknowledgment that raw-materials prices are likely to remain low
for an extended period, a challenge for companies that borrowed
heavily to scoop up mines when prices were high.
So far this year, iron ore has slid 22%, and copper is down 19%.
Nickel has tumbled 31%, while coal has fallen at least 10%,
depending on the type.
In the first quarter, trucks laden with tons of bluish-gray
rocks that contain copper started to rumble across Utah to Rio
Tinto's smelting facility, with a smokestack nearly as tall as the
Empire State Building, on the southern shore of the state's Great
Salt Lake. But in a shift from the past, the copper ore is owned by
other producers, which are paying Rio Tinto a fee to heat the rocks
to 2,400 degrees Fahrenheit to pry the copper loose of silica, iron
and sulfur.
"It is vital that we remain focused on reducing our costs,
increasing our productivity and ensuring that we derive the maximum
value from our operations," said Jean Sébastien Jacques, chief
executive of Rio Tinto's copper and coal group.
For years, mining companies left refining, blending and trading
of ores to multinational commodity traders such as Glencore PLC and
Trafigura Beheer BV. Now, miners are encroaching on trading firms'
turf. Glencore and Trafigura declined to comment.
The strategy is fraught with risks, and the profit potential is
scant, some analysts and investors said. These downstream
activities are capital-intensive, margins are razor-thin and
ill-timed trades could result in steep losses, they said.
"It is probably not the best odds that it will work out real
well or they would have been in that business in the first place,"
said Michael Ball, portfolio manager with Weatherstone Capital
Management, which oversees $675 million. The efforts "speak to the
fact that companies believe they've got a longer-term issue on
their hands."
Weatherstone closed out its sole mining-sector bet nine months
ago and is avoiding new wagers due to signs of slack metal demand
in a sluggish global economy.
Lucas Pipes, a metals and mining-sector analyst at investment
bank FBR & Co., said it is prudent for mining companies to
expand the range of their operations, but the returns on these
activities for most won't be much more than a rounding error. "This
is common for the bottom: You're fighting over pennies," Mr. Pipes
said.
Last fall, Vale opened a $1.4 billion ore-blending terminal in
Malaysia, to better cater to Asian buyers. Vale's customers have
been willing to pay extra for that blended ore, as much as $3 a ton
on top of the benchmark price, most recently $55.90 a metric ton,
company executives have said. Anglo American's decision to trade
its own platinum-group metals, such as palladium and rhodium in
addition to platinum, has bolstered profit at Anglo American
Platinum by 2%, said Andrew Hinkly, executive head of marketing at
the subsidiary.
Anglo American ended its two-decade arrangement to sell these
metals through Johnson Matthey PLC, a specialty-chemicals company,
in 2012.
"Does it move the needle? No it doesn't," said Tim Gramatovich,
chief investment officer at Peritus Asset Management, which
oversees about $1 billion. It "provides some stability to what
they're doing...but the only thing that brings these guys back is
supply and demand."
Some mining companies said few choices are left. In the U.S.,
several coal-mining firms have recently filed for bankruptcy
protection, and healthier rivals are exploring trading as a way to
keep coal competitive with a flood of natural gas.
Murray Energy, based in St. Clairsville, Ohio, launched its own
trading unit, Javelin Global Commodities Ltd., to pioneer contracts
with flexible pricing and volumes. It is a departure for an
old-fashioned company whose chief executive used to referring to
his supply contracts as "marriages." Last week, Murray also bought
its first mines outside the U.S. from Goldman Sachs Group Inc. with
an eye to blending Colombian coal with U.S. coal for international
buyers.
"The producers can't just sit on their hands and say they can't
do deals like that," said Peter Bradley, Javelin's chief executive
and a former commodities trader at Goldman Sachs. "Otherwise, their
industry is going to go away."
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(END) Dow Jones Newswires
August 20, 2015 05:44 ET (09:44 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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