The 2016 calendar has been much kinder to mining companies than the last three years in which the industry suffered a major setback. While the turnaround has much to do with the significant rally for the precious metals so far this year, there have also been important changes in how many of these companies have their finances structured, as well.
Freeport-McMoRan (FCX) recently sold its key copper mine in the Democratic Republic of Congo (DRC) for $2.7 billion. This move is just one of many for Freeport and its peers have made that are intended to reduce the debt load that these firms accumulated during the commodities rally that occurred between 2009 and 2011.
Apparently, however, the Congolese authorities claim that Freeport never made them aware of the impending sale. The state mining company, Gécamines, said it didn't receive advance notice of the deal. Gécamines owns a 20% stake in the mine in question. This is not the first time that officials in the DRC have objected to the sale of mines that the state is a stakeholder in.
Combating Conflict Metals
Mining experts in Europe are now pushing for more accountability in the battle against so-called "conflict metals." This refers to rare and valuable minerals that are acquired from bad sources. Understandably, regulators are concerned about legitimate funds going into the coffers of outlaw groups that support slave labor, terrorism, and warfare.
There are advisory guidelines for sourcing these kinds of conflict metals. Now, supporters are hoping they become mandatory for companies who do business in "conflict zones" identified as particularly high risk, such as the DRC. The only way to combat this issue seems to be diligent investigations into supply chains by the companies themselves, which is unlikely to happen unless it is enforced. This problem is definitely not limited to Europe; similar measures were passed into law in the United States.
Research shows that mining companies are building a net hedge position so far in 2016. This makes sense given how badly these same firms were burned by not hedging their positions during the last commodities boom. The practice, which locks in guaranteed prices for a producer's output, was not in vogue during the bull market for gold that developed during the last decade. Although the industry was in a net hedge position during the fourth quarter of 2015 and again to begin this year, about three-quarters of the 40 largest mining firms actually trimmed their hedges. This shows that the strategy of hedging production is being pursued in large volume by a minority of miners.
At a recent mining conference hosted by Bank of America Merrill Lynch, Glencore (GLEN) CEO Ivan Glasenberg reflected on some of the mistakes the industry made during the recent downturn. He flagged massive expansion financed by debt just for the sake of doing so as one major misstep.
According to Bloomberg, he made a recommendation to the effect of, "Growth for the metals industry should mean cash flows and earnings, not digging up as many tons as possible." One of the company's slides from the presentation suggested, "Accept that volume growth cannot be an end in itself."
The mining sector poured $1 trillion into expansion and acquisition over a 12-year period. The advice from such a prominent voice within the mining industry is seen as a warning for other firms not to repeat these mistakes.
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