By Alex MacDonald
LONDON--Globally diversified miner Anglo American PLC said
Thursday it will incur $3 billion to $4 billion in write downs in
the first half of this year, signaling the toll that a continued
slump in commodity prices is taking on the mining industry.
The world's fifth-largest diversified miner by market
capitalization said it decided to report the noncash post-tax
impairment charges after taking into account "significant further
weakness and ongoing volatility in the prices of the bulk
commodities, particularly iron ore and metallurgical coal" during
the first half of the year.
The majority of the write down will come from its Minas Rio
project, said a person familiar with the matter. Anglo is due to
report its first half results next Friday.
Iron ore prices have fallen by nearly a third since the
beginning of the year due to slower-than-expected economic growth
in China, the largest consumer of the steelmaking raw ingredient,
and a sudden wave of extra supplies from mining titans Rio Tinto
PLC, BHP Billiton Ltd., and Vale SA, which have been ramping up
production after completing major expansion projects.
The onset of additional, low-cost iron ore supplies has wreaked
havoc on smaller iron ore producers in Australia and West Africa as
the spot iron ore price dropped to a more than 10-year low of
$44.10 a metric last week, according to The Steel Index. Iron ore
miners such as London Mining PLC and African Minerals have already
closed shop while others in Australia are struggling to stay
afloat.
Anglo American acquired the Minas Rio project in 2007 as other
miners were scurrying to scoop up assets to benefit from China'
insatiable demand for iron ore. But the project fell more than five
years behind schedule and costs ballooned to $8.8 billion from an
initial $2.7 billion estimate, prompting the company to write down
the value of the project on two separate occasions by $7.5 billion
as iron ore prices fell.
The project shipped its first ore in October but mining analyst
Ben Davis at Liberum Capital expects the project won't generate
positive free cash flow for another three years, given the low iron
ore prices. "I doubt this is the last impairment" on Minas Rios, he
said.
Anglo American's shares hit a near 13-year low last week as a
result of the continued commodities price rout stemming from
weaker-than-expected Chinese economic growth and a supply glut in
many of the commodities it produces.
The company has slashed costs, boosted mining performance and
sought to sell unwanted assets in an effort to turn around its
fortunes, but tumbling commodity prices, particularly in iron ore,
copper, coal, and diamonds--four key earnings drivers for the
company--has eclipsed those efforts.
It has also struggled to find buyers for a series of copper and
platinum assets slated for sale, prompting some analysts to
question whether the miner should cut its dividend given
expectations of protracted weakness in commodity prices, continued
negative free cash-flow generation and a heavy debt load.
Anglo American reported mixed second-quarter output across its
commodities. Diamond output, its largest earnings driver last year,
fell 6% on the year to 8 million carats in the second quarter,
while iron ore output, its second-largest earnings contributor last
year, rose 6% on year to 12.2 million tons following a ramp-up of
the Minas Rio iron ore project. Refined platinum equivalent output
rose notably in the second quarter while copper and nickel output
both fell during the same period. Meanwhile export coal output also
rose.
Write to Alex MacDonald at alex.macdonald@wsj.com
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