Analysts say some of the mines acquired during the commodity upcycle were high-cost operations, which are not viable at lower commodity prices. Photo: Bloomberg
Mumbai: When Aditya Birla Minerals Ltd acquired Mt. Gordon copper mine in Western Australia in September 2003, its second in Australia, the firm’s chairman Kumar Mangalam Birla described it as strategic step in the company’s plan to become a globally competitive copper miner.
The acquisitions coincided with the start of a commodity supercycle that began at the turn of the century and stretched until the global financial crisis in 2008 pulled down prices across asset classes. But rapid growth in China led to a quick resumption of the commodity up-cycle in early 2009, which stretched until late last year.
Over this period, Aditya Birla Minerals and a number of other Indian companies, such as JSW Steel Ltd, Tata Steel Ltd and Jindal Steel and Power Ltd, bought overseas mines to feed their metal plants.
“Everybody was chasing assets back then, everybody thought there will not be any resources left. Everyone is smarter in hindsight,” said Anjani Agarwal, partner and national leader (metals and mining) at EY.
The commodity cycle has now reversed. The Bloombergcommodity index has fallen 51.61% from 2008 till date. Global iron ore prices are down 45.7% over the same time frame. London Metal Exchange copper prices are down 27.4% and global coal prices are at record lows.
As a result, a number of the mines acquired during the upcycle are now lying idle and some are up for sale.
On Monday, Aditya Birla Minerals sold the Mt Gordon copper mine for a cash payment of A$15 million, lower than the A$21 million it paid for the mine.
The Mt Gordon copper mine has been shut since 2013.
JSW Steel, which acquired a cluster of smaller mines in Chile in 2008, placed these operations “under care and maintenance” in April 2015.
The firm declined to comment on the road ahead for these operations.
Some like Tata Steel Ltd have been forced to take impairment charges on their overseas mines.
In May, Tata Steel announced a write-down of Rs.6,500 crore for 2014-15, which included a write-down of investments made in overseas raw material projects in Mozambique and Ivory Coast and a taconite project in Canada.
In March 2007, Tata Steel acquired a 35% stake in Riversdale Mining Ltd’s Mozambique coal project for A$100 million. In December 2007, Tata Steel and Sodemi, a Ivory Coast-run mining company, entered into a joint venture agreement for the development of Mount Nimba iron ore deposits in West Africa.
“The economic viability of these projects remains uncertain at the current level of commodity prices,” the company said in a statement in May.
Tata Steel did not respond to an email sent on Monday asking whether it is looking to sell mining assets.
Analysts say that part of the problem lies in the fact that some of the mines acquired were high-cost operations, which are not viable at lower commodity prices.
“During a weak commodity price cycle, we see high-cost, less efficient mines shutting, or being sold off, as they are not sustainable at the current prices. There is no history of any Indian company making profit out of overseas mine acquisitions,” said Piyush Jain, equity research analyst-energy, industrials and basic materials, Morningstar Investment Advisor Pvt. Ltd.
Debasish Mishra, senior director, consulting, Deloitte Touche Tohmatsu India Pvt. Ltd, said pressures in the domestic market and a pile-up of debt on the balance-sheets of some of these firms are also factors that may push firms to sell acquired mines.
“Since there is no immediate trigger for a bounce-back, companies with stressed balance- sheets can consider exiting their investment by booking a loss,” said Mishra.
To be sure, Indian companies are not alone in wanting to dispose off mines, even if at a loss. Bloomberg had on Tuesday reported that the US-listed Teco Energy Inc. sold one of its coal mining units for no upfront payment to Kentucky-based Booth Energy Group’s Cambrian Coal Corp.
“Teco said it may receive $60 million should coal prices reach “certain levels” over the next five years,” the report said. The sale captured the dilemma facing a number of resources companies: whether to hold on to loss-making operations in the hope of a recovery, or to save financial resources by selling even at a loss.
“...for every non-operational mining asset being held, there is an interest cost and fixed cost that has to be dealt with,” said Goutam Chakraborty, analyst (metals and mining) at Emkay Global Financial Services Ltd.
On 19 August, Mint reported that Jindal Steel and Power Ltd will look to sell a controlling interest in its overseas mines, including a mine under its Australian subsidiary Wollongong Coal Ltd, as it looks to reduce debt and not commit further investments in “development stage” assets.
Jindal Steel and Power did not respond to an email sent on Monday.
Apart from metal companies, power companies are also struggling with their overseas coal assets. “No one knows how long the current weak commodity cycle will continue. That is the reason companies are now taking a call whether to hold on to these assets or to dispose them off and release cash,” said an investment banker, who advises metal companies, on the condition of anonymity.
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