Top three miners in the world was on fire. Vale, BHP Billiton and Rio Tinto generate operating cash flow of USD 62.6bn during 2010
As Des Kilalea of RBC Capital Markets puts it, “the reconstruction of Japan will benefit many infrastructure materials in the medium term”. For now the focus is on assessing the extent of damage to the country, following crippling natural disasters. Looking beyond the short-term, mining investment programmes could well remain unchanged, not least given the long term views built into approvals.
The pace and extent of mining capital expenditure budgets expanded significantly during 2010; 2009 had been a wound-licking year after the 2008 credit markets crisis. For the market leaders, capital expenditure during 2010 exceeded the peak seen in 2008.
BHP Billiton, Vale, and Rio Tinto produced aggregate operating cash flow of USD 62.6bn during 2010, setting all kinds of records, and underpinning some of the world’s biggest market capitalisations (values). BHP Billiton, the world’s biggest diversified resources stock (it is also in the oil business), led the pack, with operating cash flow of USD 24.7bn, underpinning a market value of USD 220bn.
Investors want growth, and these stocks are delivering. BHP Billiton spent nearly USD 10bn on capital expenditure during 2010; deducted from operating cash flow, this left the group with USD 14.8bn in free cash flow.
TOP THREE MINERS*
| USD m | 2010 | 2009 | 2008 | 2007 |
| Operating cash flow | 62,591 | 27,585 | 55,380 | 35,942 |
| Capital expenditure | -27,122 | -22,237 | -26,696 | -19,442 |
| Free cash flow | 35,469 | 5,348 | 28,684 | 16,500 |
* BHP Billiton, Vale, Rio Tinto
Investors also demand cash when it is flowing this freely; here, BHP Billiton recently announced an expanded capital management programme (share buy backs) of USD 10bn, scheduled to be complete by the end of 2011. This is nothing new: over the past five years, the group has bought back USD 12bn worth of its own stock, and paid shareholders just over USD 18bn in cash dividends.
BHP Billiton’s muscle can be compared to Exxon Mobil, the world’s most valuable listed stock of any kind, at USD 409bn. During 2010, ExxonMobil produced USD 19.5bn in free cash flow (compared to BHP Billiton’s USD 14.8bn). Given BHP Billiton’s diversification, this suggests either that ExxonMobil could be overvalued, or that BHP Billiton could be undervalued. And the oil business does not look the same as BHP Billiton going, big time, into potash.
For BHP Billiton, Vale and Rio Tinto, the key common cash-flow denominator is unquestionably seaborne iron ore. The three dominate the global trade, where prices are set by the cost of the final tonne of iron ore produced by the highest-cost producer. Demand is overwhelmingly driven by China, not only the world’s biggest steel producer, but also a country where over the past decade domestic iron ore output has contracted, giving external iron ore miners a double whammy, as China turned into an iron ore importer.
China’s overall high rates of growth could continue for another two decades. BHP Billiton alone has earmarked USD 80bn worth of capital expenditure over the next five years. Vale is advertising leading global mining capital expenditure during 2011, with a budget of USD 24bn (compared to USD 12.7bn in 2010). Vale anticipates that this year’s global mining capital expenditure “is very likely to surpass” the peak of USD 120bn reached in 2008.
VALE: ADJUSTED EBITDA BY BUSINESS AREA
| USD m | 2010 | 2009 |
| Ferrous minerals | 23,976 | 8,395 |
| Coal | 21 | -1 |
| Base metals | 2,294 | 1,159 |
| Fertilizer nutrients | 176 | 255 |
| Logistics | 345 | 295 |
| Others | -696 | -938 |
| Total | 26,116 | 9,165 |
| Source: Vale |
Vale has some things to prove. Despite significant corporate activity over the past five years, starting with hefty acquisitions in nickel in 2006, Vale has yet to demonstrably diversify its earnings stream beyond the absolutely astonishing capabilities of its iron ore division. The emphasis over the next five years targets a stupendous increase in iron ore output, along with significant increases in output of nickel, copper, coal, potash and phosphate rock.
| Vale, ’000 tonnes | 2011e | 2015f | Change |
| Iron ore | 311,000 | 522,000 | 67.8% |
| Nickel | 295 | 381 | 29.2% |
| Copper | 332 | 691 | 108.1% |
| Coal | 11,600 | 42,000 | 262.1% |
| Potash | 800 | 3,400 | 325.0% |
| Phosphate | 6,400 | 12,700 | 98.4% |
Rio Tinto, which is yet to banish the ghost of spending USD 37bn in cash on the Alcan acquisition in 2007, reported a significant comeback in 2010. The overall aluminium division, however, contributed just USD 733m to underlying earnings. This could seem tragic, considering that Rio Tinto already operated a big aluminium business before it pounced on Alcan, outbidding at least one potential rival.
Rio Tinto has approved USD 12bn of major capital projects since the start of 2010. This includes what Rio Tinto describes as “Australia’s largest fully integrated mining project through the expansion of our iron ore business in the Pilbara towards 283m tonnes a year by 2013, and continue to finalise studies into the phase two expansion to 333m tonnes a year by 2015″.
Rio Tinto’s numbers for 2010 show that the group also relied heavily on its existing iron ore division. Copper contributed well; after iron ore, copper ranks as one of the world’s most profitable minerals, along with coking coal, a business globally dominated by BHP Billiton.
Rio Tinto
Underlying earnings
| USD m | 2010 | 2009 | 2008 |
| Iron ore | 10,189 | 4,126 | 6,017 |
| Aluminium | 733 | -560 | 1,237 |
| Copper | 2,534 | 1,878 | 1,597 |
| Energy | 1,187 | 1,167 | 2,581 |
| Diamonds & minerals | 328 | 800 | 474 |
| Other | -984 | -1,113 | -1,603 |
| 13,987 | 6,298 | 10,303 |
As an essential ingredient in iron ore reduction, coking coal’s fortunes are largely tied into the steel cycle. BHP Billiton’s heftiest earnings contributors can be identified as iron ore, its high-margin oil business, coking coal and copper. Along with its other divisions, the group’s diversification is likely to remain supreme for the foreseeable future.
BHP Billiton, financial year to 30 June
Underlying earnings before interest, depreciation & tax
| USD m | 2010 | 2009 | 2008 | 2007 |
| Oil & gas | 4,573 | 4,085 | 5,485 | 3,014 |
| Aluminium | 406 | 192 | 1,465 | 1,856 |
| Base metals | 4,632 | 1,292 | 7,989 | 6,875 |
| Diamonds/other | 485 | 145 | 189 | 197 |
| Nickel | 668 | -854 | 1,275 | 3,675 |
| Iron ore | 6,001 | 6,229 | 4,631 | 2,728 |
| Manganese | 712 | 1,349 | 1,644 | 253 |
| Coking coal | 2,053 | 4,711 | 937 | 1,247 |
| Steam coal | 730 | 1,460 | 1,057 | 481 |
| Other | -541 | -395 | -390 | -259 |
| Total | 19,719 | 18,214 | 24,282 | 20,067 |
Some big miners
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