The world’s biggest mining and steel companies have wiped about $50 billion off project valuations in the past year and the purge is poised to continue this earnings season as managers reassess expensive takeovers.
Anglo American Plc (AAL), Vale SA (VALE3) and Rio Tinto Group (RIO) led the writedowns as declining metal prices, rising project costs and slowing demand forced reviews. Glencore International Plc (GLEN) may write down some nickel and copper assets acquired through its takeover of Xstrata Plc (XTA), Liberum Capital Ltd. has said. BHP Billiton Ltd. (BHP) may trim aluminum operation valuations, according to Goldman Sachs Group Inc. and Sanford C. Bernstein Ltd.
Executives and shareholders are paying the price for a $1.1 trillion M&A binge over a decade. Failed deals in aluminum and coal caused $14 billion in writedowns at Rio and cost Chief Executive Officer Tom Albanese his job this month. Cost overruns contributed to Cynthia Carroll’s departure as CEO of Anglo American, which slashed $4 billion off the value of its Minas- Rio iron-ore project in Brazil yesterday. She leaves in April.
“Companies are now starting to come clean with many of the mistakes they’ve made over the last few years,” Evy Hambro, manager of BlackRock Inc.’s $12 billion World Mining Fund, said in an interview with Bloomberg Television. “It wouldn’t surprise me to see more writedowns.”
A writedown is a reduction in the value of an asset carried on a company’s financial statement if it’s deemed to be overstated compared to the current market value. Estimated valuations can be reviewed over time.
Anglo American fell 20 percent in London trading last year, while Glencore slipped 10 percent. BHP gained 13 percent and Rio Tinto 12 percent. Earnings from Melbourne-based BHP are due Feb. 20, while Glencore’s 2012 financials are expected March 5.
The mining industry’s merger and acquisition missteps have been compounded by higher costs for energy, labor and construction materials. That has trimmed profits, sapped investor appetite for further deals and spurred calls for greater returns.
The Bloomberg World Mining Index rose 2.9 percent last year after dropping 31 percent in 2011. The Dow Jones Industrial Average gained 7.3 percent last year and 5.5 percent in 2011.
Glencore may write down as much as $2 billion following its $37 billion takeover of Xstrata Plc, due to be completed in March, according to Richard Knights, an analyst at Liberum said.
BHP, the world’s biggest mining company, may lower the valuation of its nickel and aluminum assets by about $5 billion, Bernstein said in a report today, while Goldman Sachs said in January that BHP may take a $2 billion to $3 billion impairment on aluminum. BHP in August announced a $3.3 billion charge on gas and nickel assets. Spokesmen for BHP and Glencore declined to comment.
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