Most mining CEO’s are very bad at picking value in takeovers. The latest Newcrest-Lihir writedowns and a further Rio Tinto-Alcan writedown in NZ are reminders that mining company shareholders are usually best to sell when mining companies make big bids.
When we remind ourselves of a few past disasters we see that too many past mining CEO’s did not do their homework.
I believe that the next set of mining takeovers will come from people who are good managers rather than traditional miners.
History tells us a lot. Rio Tinto acquired full ownership of its efficiently run Australian operation in 1995 and over time added a large bureaucracy in London that served limited purpose. After a brilliant purchase of North in 2000, Rio Tinto simply did not have the skills to make good acquisitions.
And so when the colonials in the form of BHP began looking to acquire Rio Tinto around 2006-07 the Londoners devised a poison pill — they paid $38 billion for Alcan. Alcan was worth nothing like $38 billion and Rio lost about $30 billion of its investment. When it had recovered from Alcan it made a $4 billion play in Africa and lost $3 billion. It is consistent.
But we should not forget that after Rio had bought Alcan, BHP actually kept trying to buy Rio Tinto. Had BHP been successful it would have suffered the same Alcan losses.
BHP has also had a very sorry takeover history. It bought Magma Copper for about $3 billion in 1995 and lost the lot. At the time, combined with other losses, the Magma disaster brought BHP to its knees.
Then in 2001 BHP gave 40 per cent if its asset jewels to the shareholders of Billiton in exchange for Billiton assets that proved to be worth only token sums. The merger did enable BHP to become a global company but it was a very expensive way to do it.
BHP acquired WMC in 2005 for $9 billion cash and recouped most of the outlay with a boom in nickel prices in the next year or two. But long term the WMC nickel assets had little value and BHP has been unable to convert WMC’s enormous Olympic Dam deposits into a bigger mine.
Probably the best mining takeover operator is Xstrata’s Mick Davis. He was an executive at Billiton and played a big role in engineering a price for Billiton that was a gross overvaluation.
Then as head of Xstrata be bought MIM for what was then a low sum and went onto to make a string of successful takeovers, helped by the mineral boom.
But Mick was not infallible. He tried to buy LionOre and lost out to the Russians who paid some $6.8 billion. Mick did not know LionOre was close to worthless and the Russians got quite a shock when they found out.
Had Xstrata been forced into a $6 billion LionOre writedown, history would have been different.