31 Aug The impact of the pandemic on international mining
According to S&P Global Market Intelligence’s estimates, during the first half of 2020, 275 sites in 36 countries recorded some type of interruption in their operations due to the pandemic. However, the market value of the companies continues to rise, and as of June, they registered an average growth of 10.7% compared to the previous month.
Although the pandemic produced by Covid-19 has not given countries and different markets a break, mining companies have sought strategies to continue operating without neglecting the health of their workers, helped, in part, by being declared an essential sector in Latin American countries, Canada or South Africa.
However, and according to S&P Global Market Intelligence, during the first half of 2020, 275 operations around the world registered some type of stoppage, which affected their production to some extent. According to the entity’s annual estimates, the impact of this would be less than 5% of the totalized production.
The optimism around the economic measures that the Chinese government has announced to reactivate the economy and the first deconfinement measures that have allowed the economy to reactivate have boosted the value of certain metals. Copper, iron, gold, or silver are some of the minerals that have registered an increase in their values, driven by the lower supply, which has helped to amortize the crisis produced by the pandemic.
“The balance of risks will be to the downside and the recovery of the prices of many metals remains fragile. Given that supply interruptions are uncertain, we expect the second semester to be driven by demand and, in particular, by the trajectory and magnitude of the recovery as the main economies reactivate”, indicated analysts of the entity.
On the other hand, the market value of mining companies worldwide registered in June an average growth of 10.7% compared to the previous month, according to S&P analyzes. In this context, 21 of the 25 largest mining companies in terms of market capitalization posted profits during that month.
But how has Covid-19 affected some of these companies? We reviewed the financial reports of BHP, Teck, Vale, Freeport, Rio Tinto and, Anglo American, to elucidate the real effect of the pandemic on their results and production.
The hit of the pandemic
According to the annual report for the fiscal year ended on June 30, 2020, BHP reported an impact on its operations due to the pandemic of US$ 348 million (before taxes), which “represents the following impacts: lower volumes in our active operations for US$ 112 million; temporary closings in our investments accounted for in non-operating equity (Antamina and Cerrejón) of US$ 53 million; and additional costs incurred in our operating assets, such as temporary relocation, screening, and hygiene costs for US $ 183 million (exceptional item) ”.
The Australian also reported that the equivalent copper production of all its sites for the fiscal year 2021 is expected to be slightly lower than that of 2020, due to the impact of the reduction of its operating endowments.
Regarding projects, BHP has a portfolio made up of six initiatives under development, in oil, copper, iron and, potash, with a combined budget of more than US$ 11.4 billion. According to the company, of these initiatives, the one that will have delays will be the project located in Chile, Spence Growth Option, which despite continuing to advance in its construction, the first production is expected to be completed between December 2020 and March 2021, due to the measures taken by the company to reduce the spread of Covid-19.
“We have been agile and adapted the way we work, to deliver another resilient performance as we navigate the new and continuing challenges we must deal with from Covid-19”, explained Jean-Sébastien Jacques, CEO of Rio Tinto, in their results.
It reported that, at the end of the first half of this year, the mine’s copper production reached 266 kton, 5% less than in the first half of 2019, due to the effect of the pandemic. Regarding refined copper production, the drop was even greater, reaching 74 kton in the first half of the year, 43% less than in the same period in 2019. This was partly due not only to the coronavirus but also to a 5.7 earthquake that affected the Kennecott operation, which had to paralyze its smelter. Added to this was the 45-day stoppage to carry out scheduled maintenance.
Besides, the company reported that given the complex scenario they have had to face due to the pandemic, an Ebitda of about US$ 9.6 billion was generated, a 6% drop compared to the same period in 2019.
About other metals such as iron ore, Rio Tinto reported that its shipment increased by 3% compared to the first half of last year.
In contrast, aluminum production was affected by the pandemic, in terms of a reduction in the demand for value-added products, and where the global demand for primary aluminum fell by approximately 7%.
“We remain focused on protecting our people and communities, while continuing to operate responsibly and safely to support the economic recovery after the pandemic” said Don Lindsay, president and CEO of Teck, in the results report for the second quarter of the year. “We took steps during the quarter to further strengthen our financial position, reduce costs, and position Teck to significantly improve margins towards the end of 2020 and early 2021 as we complete large capital projects”.
The company reported that all its operations are producing and that an economic impact has been seen, which has resulted in a drop in demand and the prices of some of its products.
This, in turn, has been seen in the drop in the company’s Ebitda, which reached CAD$ 485 million, results below those registered in the same quarter in 2019, where Ebitda was CAD$ 1,264 million.
Teck reported that the costs associated with the pandemic reached CAD$ 260 million during the second quarter of the year, where CAD$ 185 million corresponded to abnormal costs incurred by the temporary demobilization of Quebrada Blanca 2, the temporary closure of Antamina operations and the reduction of production levels in all its operations at the beginning of the quarter. Also, CAD$ 75 million was related to loan costs that would otherwise have been capitalized for QB2, a project that was stopped for about 5 months and is now partially reactivated.
At the end of July, Anglo American presented the financial results for the first half of the year. “The first half of 2020 has tested society to its limits and I am encouraged, and proud, how our people have come together to do what is right for each other, for our company and society at large” said Mark Cutifani, CEO of the company.
By the end of the first half, the organization reported that they were operating with 90% capacity – unlike in March and April, where their operating capacity was around 60% -, generating an Ebitda so far this year of more than US$ 3.4 billion, a 39% drop compared to the same period of 2019.
The impact of the pandemic on its production reached an overall drop of 11% and a decrease of 16% in revenue. The company reported that these reductions “were partially offset by the strong performance of our iron ore operations in Brazil and copper in Chile”.
About this, the company highlighted the Minas-Rio iron ore operation in Brazil, and Collahuasi in Chile, which helped mitigate the general decline in production to 11% on a copper equivalent basis. In contrast, Covid-19 affected the production of PGM, De Beers, Kumba and Thermal Coal in Africa, going from a production level of around 60% of capacity in April, to 90% by the end of June.
De Beers rough diamond production decreased 27% to 11.3 million carats compared to June 2019, where production of 15.6 million carats was achieved. For its part, copper production decreased by 2%, to 313,900 tons, compared to the production reached as of June 30, 2019, which was 320,200 tons.
“We prioritize the well-being of our workforce and the communities where we operate as we execute our strategy to grow production volumes and effectively manage costs and capital expenditures to increase margins and cash flows”, said Richard Adkerson, President and CEO of Freeport, in the report of results to the first half of 2020.
The company’s revenues reached US$ 5,852 million during the first half of the year, below the US$ 7,338 million reached in 2019 in the same period.
Likewise, the report indicates that its consolidated sales during the first half of the year totaled 1,488 million pounds of copper, 103 million less than in the same period in 2019. The company explained that the impact of the pandemic was partly responsible for this fall, which stopped its Cerro Verde operation in Peru, on orders of the government of that country to contain the spread of the virus.
The company also reported that they had an increase in gold production reaching 347 thousand ounces, 21 thousand more than in 2019. Regarding molybdenum, its production reached 38 million pounds, 10 million less than in the same period from the previous year.
“Production in all Vale businesses faced impacts due to COVID-19”, explained the Brazilian company through the income statements corresponding to this second quarter.
During this period, the company reported an Ebitda of US$ 6,253 million during the first half of the year. It is worth to mention that these results implied an increase of 156% in relation to 2019, when an Ebitda of US$ 2,446 million was registered, due to the accident that occurred at the Brumadinho dam, in the state of Minas Gerais in southeastern Brazil. This fact implied a disbursement of US$ 6,036 million by the company, which affected its performance.
Vale also reported that, in the first six months of 2020, the impact of the COVID-19 pandemic on costs and expenses was US$ 112 million, of which US $ 85 million was used to combat the pandemic and US$ 27 million was due to increased costs in operations.
Several of its operations had to stop or slow down, due to the security measures taken by the company to deal with the contagion, which has particularly hit Brazil.
Regarding its iron ore production, during the first half of the year, it reached 127 million tons, 7.1% less than the same period in 2019, where production reached 136 million tons. Regarding copper production, the company reported that during the first semester they reached 179 thousand tons of mineral, 6.8% less than last year.
However, it did register a 12.8% increase in nickel production due to a better performance of its North Atlantic refinery, going from 99.8 million tons to 112 million this 2020.