What does Barrick Gold, the world’s largest gold miner, have in common with Rio Tinto, the world’s second-largest iron ore producer? Quite a lot, as it became clear this week.
On Thursday, Barrick posted a $3 billion loss for the fourth quarter, while while Rio recorded the same loss for the full year, as both suffered writedowns against mining assets they bought at the top of the market.
Rio Tinto’s first ever full-year loss came shortly after it announced a $14.4 billion charge against its aluminium and coal businesses, while Barrick’s $3.8 billion writedown of its Lumwana copper assets wiped out otherwise strong returns for the year.
With the benefit of hindsight, the valuations look hopelessly toppy, but few people called them that at the time.
Copper prices were just coming down from all-time highs of $10,100 per tonne as Barrick made its bid for Lumwana owner Equinox in April 2011; aluminium prices topped out above $3,200 per tonne a few months after Rio’s $38 billion takeover of Alcan closed in November 2007.
Equinox was already struggling with Lumwana’s costs at the time, but the mine economics made sense if one was to assume, as many did, that copper prices would hold at those levels.
And while the price tag for Alcan appears steep today, it is worth remembering that Alcoa was ready to pay $33 billion before Rio stepped in as a white-knight bidder.
It is also worth remembering that Rio and Barrick are not alone in facing writedowns: Vale has taken a $4.2 billion hit on its nickel and aluminium assets, while BHP Billiton is expected to make a multibillion-dollar impairment against its aluminium business when it posts full-year results later this month.
On Friday, Anglo American reported a full-year loss of $1.5 billion following a $4 billion writedown on its Minas Rio iron ore assets in Brazil.
And after the writedowns, divestments will follow, as both Barrick and Rio Tinto signalled on Thursday, using identical terminology.
Barrick is focused on ‘disciplined capital allocation’, while Rio Tinto pledged to reinforce ‘capital allocation discipline’. Anglo used the same term on Friday as it sought to move on from its loss.
What this sterile phrase signals is that after years of massive spending chasing equally massive commodity returns, the mining industry is returning to an age of austerity.
Tom Albanese and Aaron Regent – who led Rio and Barrick during the age of abundance – have paid for their excesses with their jobs, as has Anglo chief Cynthia Carroll.
With their departures fresh in the mind, it is not surprising that Rio boss Sam Walsh and Barrick ceo Jamie Sokalsky echoed each other so closely in their pledges to live within their means.
Aside from returning cash to shareholders, capital allocation discipline will mean divesting or mothballing all non-core production assets, while new projects are likely to be scaled back or scrapped altogether. As Sokalsky said on Thursday, as a policy the company will not be building any new large mines.
He calls this strategy a “new paradigm; a new way of running the business”, but really there is nothing new in this approach: it is a natural and cyclical function in markets where supply responds to prices in an inelastic way.
Producer discipline is not new to the mining industry, and nor is the chronic underinvestment it inspires. But that’s a discussion for a few years’ time.
Mark Burton
mburton@metalbulletin.com
Twitter: @mburtonmb
[An earlier version of this article incorrectly reported that Barrick recorded a $3 billion loss for the full year, when this result was for the fourth quarter. Its full-year loss was $670 million.]