Of all the issues that concern the mining industry at the moment, two remain glaring nemeses to the growth and sustainability of overseas mining projects. The deterioration of the Chinese economy and reduced demand for mineral resources across the world have forced mining giants to slash costs by selling off low production mines and looking for creative ways to gain back revenue.
BHP Billiton (BHP) has not had it easy in recent years, but the current scenario has caused even the most confident investors to question the future of the company. I believe that BHP executives understand this more than anyone else as they have started to take some very commendable steps in that direction. BHP's administration seems to realize that, beyond its environmental record and diversification of projects, investors are concerned about a lack of coherence within BHP when it comes to its operations. BHP manages several mines and plants across the world, and it now realizes that many of these mines may not be necessary for it to grow further.
BHP recently announced that it is considering the possibility of selling off its Pinto Valley copper mine. The mine is located in the Miami area of Gila County, Arizona. The Pinto Valley copper mine has been under maintenance since 2009 and has virtually earned nothing for the company since then. Back in 2009, BHP shut down its Ravensthorpe nickel project in Western Australia, which indeed helped the company to consolidate its more important and productive mines. If BHP sells the mine to a prospective buyer, I surmise the company will be able to get a huge burden off its shoulders.
If the Pinto Valley mine were operational, it would have produced 60,000 tons of copper concentrate. The mine holds a wealth of copper and molybdenum concentrate, but is not large enough for BHP's portfolio. BHP had hired 600 employees and invested $195 million at Pinto Valley. Though unrelated, a contract worker's fatal injuries at the plant contributed to a negative outlook at the mine and finally it seems the company has decided to sell the project.
BHP is on a selling spree at the moment. The company has already appointed brokers to sell its Brazilian aluminum assets, the Guinea iron ore project, and its redundant diamond mining business. I personally feel this strategy is smart and extremely effective, considering the two major issues that plague the mining industry today.
The Chinese economy has begun its downward spiral, and I do not see any improvements in its economy in the near future. If one remembers the final U.S. presidential debate, both Obama and Mitt Romney tried to sound very tough on China. Such tough language will not have a positive effect on the Chinese economy, which is already embroiled in its own domestic fiscal issues. China was one of the largest buyers of BHP's copper. But with virtually no demand from the Asian giant, BHP does not need to continue operating its smaller mines. In addition to this, economies across the world are not very strong, and there is a reduction in material demand. These two factors alone prove that BHP is making the right moves to increase profitability and cut costs. So far, BHP executives have declined to comment about the possible sale.
Barclays (BCS) has its own copper mining venture as well. The company recently announced that it intends to buy the Botswana-focused copper mine. Cupric Canyon Capital, a private equity firm managed by Barclays, is all set to buy Botswana's Hana Mining. Rio Tinto (RIO), on the other hand, is more positive about its copper output in the near future. The mining giant announced that it expects its copper output to increase in 2013. Meanwhile, BHP competitor Freeport-McMoRan (FCX) expects to increase its copper output as well, though its production has declined in recent years. Freeport's key Grasberg mine in Indonesia produced low quality ores, leading to disappointment. But BHP competitor Southern Copper's (SCCO) nearly 28% advance in its one year chart reveals a different story altogether. Though the current scenario indicates that the copper market is suffering, the market may bounce back in the near future, helping copper mining companies to rake in more profits.
BHP is currently trading around $71 and has a market cap of $190 billion. With an enterprise value of $213 billion, BHP surely knows that selling a small mine in a corner of Arizona is not going to affect its larger business. But, it will help the company to slash costs and streamline its activities. BHP currently has a profit margin of 21% and an operating margin of 39%.
This high level of profitability will help investors to remain assured that their shares will fetch the income they expect. The company currently holds total cash of $4.83 billion and total debt of $28.59 billion. However, it also has an operating cash flow of $24.38 billion, which assures those who are worried about the company's high debt rate.
Certainly, selling smaller and non-operational mines like the one in Arizona will help BHP to consolidate its position in the mining world. By getting rid of smaller projects, it will be able to focus on larger projects which bring more wealth and revenue to its coiffures. In the long run, larger projects will ensure long-term profits. Selling a mine like the one in Pinto Valley is a very smart decision. In spite of a largely unremarkable recent past, I feel BHP is going in the right direction when it comes to future activities.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.