BHP Billiton, Rio Tinto, Freeport-McMoRan, Goldcorp and New Gold have their work cut out for them, and are scrambling to adjust for potentially lower margins as metals prices drift lower.
The rumor mill has it that BHP Billiton (NYSE:BHP) is planning on another major acquisition. The British newspaper the Telegraph is reporting that BHP is plotting an acquisition of Walter Energy (NYSE:WLT), a coal producer based in Birmingham, Alabama.
Walter produces metallurgical, steam, and industrial coal. It also owns a subsidiary that harvests natural gas from coal fields. BHP has been trying to buy into the U.S. natural gas business for some time. British newspapers claimed that BHP may have lost as much as $5 billion in its efforts to move into gas.
Few details about the acquisition plans are available. Although media speculation indicates that BHP is planning a multibillion dollar bid for Walter, British reporters are citing the usual stock market rumors and inside sources, so these stories may not be credible. Walter operates coal mines in the U.S., Canada, and the United Kingdom.
These acquisition rumors may not be true because BHP seems to be slowing its operations in other areas. Some media reports indicate that BHP could be planning to scale back on its ambitious expansion plans. This could include scrapping some projects or delaying them until conditions improve.
Such acquisition rumors are likely to hurt BHP's stock value. The company has already lost $5 billion in forays into the gas business. Any new attempt to move into it is liable to spook stock buyers. Long-term, however, such an acquisition could bolster BHP's position by giving it new profit centers in one of its core businesses - coal mining.
BHP Metals Boss Hints at Scaled Back Expansion plans
Alberto Calderon, the BHP Billiton executive in charge of nickel, aluminum, and corporate development, told analysts and reporters at the Macquarie Bank conference in Sydney to "approve projects in a sequence that maximizes value, reduces risk, and balances long- and short- term returns." That means BHP is considering scrapping or shelving some of the projects in its ambitious $80 billion growth plans.
Calderon specifically mentioned protecting BHP's Class A credit rating and progressive dividend as two of his chief concerns. Fox News speculated that this meant Calderon is trying to reassure creditors and investors about his company's future plans.
Analysts at the conference told reporters that one of the projects that BHP could shelve is the expansion of the massive Olympic Dam copper and uranium mine in Australia. BHP recently bought up a large amount of mineral rights around Olympic Dam to clear the way for the expansion. Available news stories don't contain anything that indicates Calderon actually mentioned Olympic Dam at the conference. A Citigroup analyst, quoted by Fox News, said Calderon had mentioned Olympic Dam as one of two projects that could be cut back.
Calderon did tell analysts that he thinks China's steel industry will keep expanding at a frantic pace for the foreseeable future. He thinks Chinese steel expansion will continue until about 2030, but. Calderon did not say what he based those conclusions upon.
BHP and Rio Tinto (NYSE:RIO) both told one of their key suppliers that they are planning to scale back operations in the near future, the Financial Times reported. Weir Group, which makes industrial pumps used in mines, has received reports that BHP and Rio Tinto are scaling back expansion plans. No source or proof for these claims was made. Since pumps are used in underground mines, this could indicate that BHP and Rio Tinto are planning to limit expansion of more expensive underground mining operations.
The new conservative attitude at BHP should be good news for investors. The company hasn't lost money yet but it's been taking some serious risks in recent years. The willingness of management to put cash flow and profitability ahead of pet projects could attract value investors and drive stock prices back up.
Labor Strife at Escondida
If BHP didn't have enough troubles, it is again facing labor unrest at the giant Escondida copper mine in Chile. Reuters reported that members of a contract workers (temporary workers) union blocked the entrance to the mine on Tuesday, May 1.
The cause of the conflict was unclear, but a spokesman for BHP claimed that production was unaffected. A union spokesman claimed that a settlement to the underlying dispute was also imminent. Reuters noted that members of other unions didn't join the contractors.
Escondida is so large that labor troubles at it can affect the price of copper. A two week strike at the mine last year pushed copper prices to new highs in August. That means news of new labor troubles at Escondida could send Billiton stock prices falling.
Chile Supreme Court Suspends work at Goldcorp Project
Reuters reported that all work at the project was suspended after the court ruled that Chile's national environmental agency had not properly consulted a local Native American tribe before approving the permit. The Chilean government had approved the permit on March 14, 2011. El Morro holds reserves of 6.1 million pounds and 8.4 million ounces of gold. Its estimated cost is now $3.4 billion. Goldcorp owns 70% of El Morro, but New Gold owns the rest.
Chile's natives have become increasingly active and vocal in their opposition to mine expansion and new mines. It is unclear if this ruling will set a precedent, which will stop other mine projects in Chile. Many international mining companies are developing new gold and copper mines in Chile.
It is unclear what recourse Goldcorp and New Gold have under Chilean law, but one possibility is that Chile's President Sebastian Perrea could intervene. Another would be to negotiate some sort of deal with the natives.
The real victims of this decision could be Goldcorp and New Gold stock. Both companies have invested heavily in El Morro and that investment could come to nothing. Don't be surprised if this leads to a sell-off in the stock. Gold miners with operations outside of Chile could benefit because a major competitor has been eliminated by local politics.
Dismal Economic Data Drives Copper Prices Down
Copper prices fell by another 3% in the first week of May, according to Reuters. The cause of the drop appears to be dismal economic news from the United States. Worse U.S. unemployment figures than expected have cast doubt on the prospect of an American economic recovery anytime soon.
Such a recovery would be needed to fuel a recovery in the world's largest copper consumer, China. China's demand for copper has fallen off in recent months. The copper price fall was prompted by a U.S. Labor Department report that found little or no evidence of increased hiring. The U.S. economy added 115,000 new jobs in April, which is less than had been expected.
One negative result of this could be that Chinese manufacturers scale back production and copper orders. Another is that U.S. industries that have been doing well, such as autos, could also scale back production. Many American companies will undoubtedly halt or scale back expansion plans after this news.
It would probably take a sustained recovery in both the U.S. and China to turn copper prices around. Such reports are sure to convince copper producers, like BHP, Freeport-McMoRan (NYSE:FCX) and Codelco, to rethink ambitious expansion plans.
The copper glut could be getting worse, according to Reuters. The news agency quoted "unidentified copper market players" who said large Chinese smelters and trading firms were about to transfer large amounts of copper cathodes to London Metals Exchange registered warehouses. If that were to happen, it could increase the copper glut and drive down prices.
An increased copper glut is going to hit the profits and eventually the stock prices of the major copper producers. Freeport-McMoRan would appear to be the most vulnerable here because it has bet the heaviest on the continuation of the Chinese boom. If the Chinese boom is over and a copper glut is here, Freeport's stock may sink faster than copper prices.
Codelco Buying Copper to Meet Supplies
There might be an interesting buyer for some of that copper glut. Britain's Financial Times reported that Codelco, the Chilean government copper company and the world's largest copper producer, actually bought copper in order to meet its orders to customers last year. The Times didn't say where Codelco bought the copper from, but estimated that it purchased between 3,000 and 5,000 tons.
This could mean that Codelco's production isn't what it says it is. It could also be an attempt to cover up other problems, such as labor troubles. The Financial Times quoted anonymous sources for its April 15 article on the subject. The same sources told the newspaper that Codelco's production is at its lowest level since 2004.
If Codelco cannot maintain its production, that's good news for producers like Freeport-McMoRan and BHP which have major operations elsewhere. The obvious beneficiary of a major fall in Chilean production would be Freeport, which has the world's largest copper mine at Grasberg. This could also mean that Codelco will have to scale back production plans, which could raise copper prices and Freeport's stock value in the long run.
The copper market is getting weirder and weirder, with Chinese smelters dumping on the international market and Codelco unable to meet demand. It is obvious that this instability is going to have some sort of effect on giant copper producers such as BHP and Freeport-McMoRan.
This week's news seems to indicate that copper miners like Freeport might be a good long-term buy. Even though the future looks dark for them in the near future, long-term prospects look a little brighter, particularly with the world's largest copper producer having problems. It seems that big copper producers like Freeport-McMoRan are facing volatile times which will definitely have an impact on their stock values.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.