By Tatyana Shumsky in New York, John W. Miller in Cape Town, South Africa, and Rhiannon Hoyle in Sydney
Mining companies, slammed by tumbling commodities prices, have
in recent days vowed not to cut production, saying the stronger
dollar is cushioning the blow of falling markets.
Companies ranging from Australian miners BHP Billiton and Rio
Tinto to smaller firms like South Africa's Lonmin PLC are
benefiting from the stronger greenback because they receive dollars
for the gold, copper and iron ore they dig up, but pay for labor
and many other costs using local currencies. When the dollar
rallies, revenue generated by metals sales stretch further in
covering expenses.
The dollar's rise is reverberating across the global economy,
dividing the corporate world into winners and losers along
geographic lines and reshaping the next phase of commodities
prices. The greenback rose against virtually all currencies in 2014
and is off to a roaring start this year, as some central banks
around the world, reaching for new ways to boost sluggish economic
growth, take steps to devalue their currencies.
Some of the dollar's biggest gains this year are against the
currencies of major commodities exporters. As of Friday, the buck
was up 5% against the Australian dollar, 7% against the Canadian
dollar and 7% versus the Brazilian real.
For many U.S. firms that do business abroad, the strong dollar
is an unwelcome development, making their wares more expensive for
buyers in other markets and reducing the value of foreign sales
when translated back into U.S. currency. But mining companies that
might otherwise be forced to mothball projects at today's
commodities prices are keeping mines open and, in some cases,
ramping up production as currency moves reduce costs.
As a result, supplies are continuing to increase, and analysts
are tearing up their forecasts for metals prices, predicting they
will fall lower and stay there longer.
"Currencies have been a relief valve," said Ben Magara, chief
executive at Lonmin.
On Friday, Anglo American PLC, the fifth-largest mining company
in the world by market capitalization, became the latest company to
highlight the benefits of a stronger greenback. The U.K. firm,
which reported a loss for 2014, nevertheless said weaker currencies
in the countries where it operates added $1.3 billion to its
profit. That was more than half the $2.4 billion hit the company
took from lower commodities prices. Anglo also said it plans to
boost iron-ore production at mines in South Africa and Brazil in
coming years, even as prices for the key steel component trade near
5 1/2 year lows.
Rio Tinto on Thursday reported a rise in profit, saying the
weaker Canadian and Australian dollars helped boost margins.
Newcrest Mining Ltd. said Friday that it would put one of
Australia's biggest gold mines up for sale to pay down debt, a move
that was possible because the sliding Australian dollar made the
mine more attractive to potential buyers.
However, some observers said a stronger dollar will only
postpone an inevitable reckoning for the mining industry. By
keeping mines open, they are feeding a global glut of metals, coal
and iron ore. Demand is sluggish from China, the world's top
commodities consumer, where the economy expanded at its slowest
pace in decades last year. And many mining companies borrowed
heavily, in dollars, to expand during the boom times; they need
profits above a certain level to pay back creditors.
"The stronger dollar has been cushioning some of the blow of
weaker commodity prices...but not all," said Daniel Rohr, director
of materials research with research firm Morningstar Inc. "Miners
need to grow production, deliver cash to shareholders and maintain
a strong balance sheet, and in a weaker price environment you
cannot do all three."
Lonmin has seen prices for platinum, its main product, drop 20%
since July. But Mr. Magara said Lonmin would maintain output this
year. He credits the greenback's surge against the South African
rand, which he said has lowered costs in that country. The dollar
hit a 13-year high against the rand on Wednesday.
The rand's decline "has been very helpful," Mr. Magara said.
"We've gained around 10% thanks to the currency, so the impact of
the [platinum] price has been mitigated."
Lonmin, like many mining companies, still faces headwinds. After
a decadelong rally in metals prices, the mining industry has spent
the past three years adjusting to a weaker demand environment.
China, whose ascent to the world's second-largest economy behind
the U.S. came alongside rapid urbanization and industrialization,
has seen its thirst for raw materials moderate.
Metals prices have plunged. Copper fell to a 5 1/2 -year low in
January and is down 7.8% this year. The price of iron ore nearly
halved last year and is off more than 10% in 2015.
Lonmin reported a loss of $188 million in the fiscal year ended
Sept. 30, because of falling platinum prices and a strike at its
South African mines. Glencore PLC said last week it would divest
its 23.9% stake in the company.
Some mining companies have retrenched, shutting down mines and
selling assets. In addition to selling its Lonmin stake, Glencore
warned in January that it could close coal mines in South Africa.
Meanwhile, others have ratcheted up production.
BHP Billiton, the world's biggest mining company, reported
record output from eight operations across five commodities in the
second half of last year. In the two years to June 2015, it said it
will have increased total production by 16%, despite broadly weaker
commodities prices. Rio Tinto increased iron-ore and copper output
last year.
But analysts and investors said there is a limit to how much the
stronger dollar can help the mining industry. "With sales,
profitability and cash flow coming down, it will impact mining
companies' ability to service their debt," said Wen Li, senior
analyst with CreditSights.
Still, some miners, at least in the short term, see a silver
lining.
Andrew Cole, managing director of OZ Minerals Ltd., a
copper-and-gold producer in Australia, said the sinking Aussie
dollar comes as a relief. The company's stock plunged nearly 80% in
the past four years on weakening metal prices and dwindling cash
reserves. But Mr. Cole said a favorable exchange rate is giving him
breathing room to improve the company's prospects.
"The drop in the currency has been somewhat overdue" and "is
certainly beneficial to us," Mr. Cole said.
For Phoenix-based Freeport-McMoRan Inc., one of the world's top
copper producers, a global footprint that includes mines in Chile,
Indonesia and the Congo is helping keep down costs. Freeport said
its average unit cash cost for producing copper will increase only
1.3% this year.
On Wednesday, Standard & Poor's Ratings Services cut
Freeport's credit rating to triple-B-minus, the lowest
investment-grade rating, citing the negative impact of weaker
commodities prices on the company's profitability.
For the global mining sector as a whole, the relative winners
right now are companies with operations outside the U.S., said Rick
de los Reyes, who manages a $1.5 billion metals portfolio at T.
Rowe Price Group Inc.
"If I had to choose between an iron-ore miner in the U.S. and an
iron-ore miner in Australia, I choose the one in Australia," Mr. de
los Reyes said.
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