LONDON – Anglo American took a $4 billion charge on Tuesday on an iron ore project bought at the top of the market.
The company said it would take a post-tax charge on its Minas-Rio iron ore project in Brazil because production costs at the site had skyrocketed.
A rival, Rio Tinto, announced a $14 billion charge this month against some aluminum and coal mining assets for similar reasons. Rio Tinto’s chief executive, Tom Albanese, resigned on the same day.
The charges show how mining companies are facing up to increasing costs for labor and infrastructure that started to weigh on the profitability of assets acquired during the takeover frenzy about five years ago. Rising commodity prices, spurred largely by a construction boom in China and other emerging economies, had tempted mining executives to pay ever larger sums for production sites.
“Over the past 12 months there was a shift from aggressive growth to capital efficiency,” said Sam Catalano, an analyst at Nomura. He added that there could be more write-downs to come as mining industry executives adopted a more conservative approach and reviewed the value of past acquisitions.
Shares of Anglo American rose 2.3 percent in London on Tuesday.
Like Rio Tinto, Anglo American appointed a new chief executive this year. Mark Cutifani, the chief executive of AngloGold Ashanti, will succeed Cynthia Carroll in April. Mr. Cutifani is expected to focus on streamlining operations and returning money to shareholders.
Ms. Carroll, who announced her resignation in October, led the initiative to acquire Minas-Rio from the Brazilian billionaire Eike Batista for about $5.15 billion in cash between 2007 and 2008. The deal was supposed to help Anglo catch up with rivals and give it a significant share of the iron ore market. But costs to develop the project have been climbing ever since, turning the asset into a major headache for management.
Total capital expenditure for Minas-Rio is now expected to reach $8.8 billion instead of the $2.6 billion the company had initially expected, Anglo American said on Tuesday. The company had to increase the spending estimate several times before – once when the discovery of caves at the site needed special geological expertise – and there were delays in obtaining some permits. Anglo American said the most recent cost increase related to gaining access to additional land, more expensive license conditions and a one-year delay in shipping the first ore from the new site.
“We are clearly disappointed that the diversity of challenges that our Minas-Rio project has faced has contributed to a significant increase in capital expenditure,” leading to the charge, Ms. Carroll said in a statement.
Anglo American had warned investors about spiraling costs at the site two months ago. But even though the charge on Minas-Rio was expected, it is “still a big number,” Ben Davis, an analyst at Liberum Capital, wrote in a note to clients.
Anglo American will book the charge as part of its 2012 full-year results, which it is scheduled to announce next month.
Article source: http://dealbook.nytimes.com/2013/01/29/anglo-american-takes-4-billion-charge-on-mining-deal/?partner=rss&emc=rss