4 de junio de 2014 / 22:59 / en 4 años

RPT-Diversity back in vogue for miners as iron ore price tumbles

(Repeats story first published late Wednesday; no change to text)

By Stephen Eisenhammer, Sonali Paul and Silvia Antonioli

RIO DE JANEIRO/MELBOURNE/LONDON, June 4 (Reuters) - After pouring billions of dollars into producing more iron ore to feed China’s construction boom, the world’s mega miners now face a self-induced price slump and are counting on other commodities to revive their allure to investors.

Base metals copper and nickel, oil and gas, as well as more offbeat commodities such as fertilizer potash, are increasingly important differentiators between the kings of iron - Vale , Rio Tinto and BHP Billiton - and could be welcome sources of growth this year as iron ore languishes near two-year lows.

BHP’s oil and gas portfolio and Vale’s nickel production have attracted positive attention. Glencore Chief Executive Ivan Glasenberg, meanwhile, has spoken of the advantage of smaller exposure to iron ore, saying it provided an “opportunity against our peers.”

Lack of diversity has not been an issue in recent years as Chinese demand for steel to build cities, railways and ports tripled iron ore prices from 2008 to 2011 - a windfall for the “big three” who produce 70 percent of the world’s seaborne iron ore.

But in May the price fell below the $100 mark for only the second time in four years, as production jumps just as Chinese demand growth appears to be slowing. Although many analysts see the price perking up again later this year, the fundamentals are worsening and the trend is downward.

Like a giant tanker, these companies are not designed to change direction at the first sign of rough seas, but those that kept a bit of diversity could find themselves in market favor if the going gets tough.

In recent weeks, as the price of iron ore fell, BHP’s stock value actually rose, breaking into a negative correlation with the commodity for only the second time in as many years. Rio also decoupled slightly, but Vale followed the steel-making ingredient lower

“Rio and Vale are so exposed to iron ore, and their investment programs are geared towards that, it’s pretty hard to see how anything cushions (a fall in price),” said Paul Phillips, a partner at Perennial Growth Management, adding “BHP has significantly more options than either of the other two.”

Whereas Vale and Rio Tinto get over 85 percent of their profits from iron ore and pellets, BHP gets less than half with oil and gas making up a fifth.

“The difficulty with a stock like Vale is that it tends to follow the iron ore price, regardless of the pretty successful cost cutting measures going on at the firm. With prices weakening it’s hard to see where the value could come from,” said Robert Secker, investment specialist at M&G Investments, whose fund sold its Vale stake last month.


Vale is also at an earlier stage of expanding production than Rio Tinto or BHP. This means a severe drop in iron ore price could squeeze the miner’s cash flow because it still has to invest heavily to complete projects at the same time as it is getting less money for every tonne it mines, analysts said.

Three fund managers interviewed in Australia all said BHP would be the most resilient of the big three in a period of lower iron ore prices. The company’s $17 billion move into U.S. shale three years ago appears to be paying off after criticism it paid too much. Glencore was popular among London analysts due to its lack of iron ore exposure.

“Oil and gas is also by far the largest part of (BHP‘s) growth of the business over the next four, five or six years,” said Brenton Saunders, a portfolio manager at BT Investment Management, which owns shares in BHP and Rio Tinto.

Vale and Rio Tinto are gambling they can drive high-cost Chinese producers out of the market by increasing supply and temporarily reducing the iron ore price. With Chinese producers out of business, production will come down, spiking the price back to a point where Vale and Rio can make serious money.

Rio Tinto is particularly well-placed for this with production plus freight costs at around $45/tonne. Vale could be in a similar position by 2016 when it finishes expanding its Carajas mine, especially if transport costs can be reduced with permission to dock their huge “Valemax” ships at Chinese ports.

But there remain a number of variables to this scenario, particularly the political cost in China of cutting thousands of jobs. This move has become easier with increasing public anger over pollution caused by steel production but it remains to be seen exactly how and when it might play out.

Some investors support a focus on iron ore and remain wary of diversification, said Carlos de Alba, analyst at Morgan Stanley, after a series of expensive write-offs on poor assets bought in boom years.

“A lot of investors say to me, ‘I don’t want the companies to diversify themselves, I can do that myself by buying an iron ore company, a nickel company, a platinum company, based on my own views of where the metal prices are going to go.”

But diversification is clearly back in fashion. Vale stressed it produced a record amount of nickel last quarter, just 200 tonnes off being the world’s top producer of the stainless steel ingredient.

Nickel could be an important source of growth for the Brazilian miner this year with prices at a two-year high as a ban in Indonesia on exporting nickel ore left buyers fearing a shortage.

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