The Incredible Shrinking Mining Sector
Who will be left to mine the world's metals and minerals? As prices for gold, silver, copper, uranium, and iron ore continue to fall, miners are increasingly turning to layoffs to help meet the need to contain costs.
Barrick Gold just announced it will lay off 30% of its corporate staff in Toronto, or about 100 people, in addition to the 55 miners it recently said it would let go in Utah and Nevada, the 22 at its Kanowna mine in central Western Australia, and the 35 people employed at its Greenfields exploration office that it's abandoning.
Barrick isn't alone in needing to gain control over costs through workforce reductions. Newmont Mining announced recently that it will eliminate a third of the positions in Colorado, and Australia's Newcrest Mining is closing its Brisbane office in a bid to reduce by 20% its overall spending costs following 150 layoffs that included its Melbourne offices earlier this year.
Cliffs Natural Resources will also initiate a new round of summer layoffs affecting 350 workers at its iron ore operations, uranium miner Uranium One is letting go of 26 workers, and while Vedanta Resources had planned to layoff more than 2,000 miners at its Zambian Konkola copper mines, it thought better of it after the government threatened to seize its operations.
Of course, this is having a ripple effect, leading Caterpillar to announce its own round of layoffs. Beginning today, 260 employees of the heavy-equipment manufacturer will be laid off for an indefinite period of time.
Initially the cost-containment programs that miners effected included just cutting back on capital expenditures and selling off underperforming or non-core assets. Even as layoffs are now a bigger part of the plan, those other initiatives are now picking up speed. Analysts at PricewaterhouseCoopers find the top 40 miners anticipating a 21% spending reduction in 2013 to $110 billion, and Barrick alone is cutting its capex budget by as much as 10%. It expects to spend between $5.2 billion and $5.7 billion this year, which is down from its previous anticipated range of $5.7 billion to $6.3 billion. It also tried to sell off its stake in African Barrick Gold earlier this year, but intended buyer China National Gold backed out. It's still trying to sell three Australian gold mines.
Rio Tinto is another miner purging its portfolio of anything that's not nailed down, putting up for sale its Australian coal assets, hiring advisors for its copper and gold mines there, and having a long-running "for sale" sign hanging on its aluminum mining business. It abandoned its Eagle nickel mine before it even got started and also tried to sell its diamond business but couldn't find a buyer.
Others selling out include BHP Billiton and Vale, which is divesting its potash project in Canada while abandoning another one in Argentina.
The sector's carnage has led to a retrenchment in mining stocks themselves. Barrick is down 60% from its 52-week high, Newmont's been nearly cut in half, and Rio has fallen by a third. Yet despite the fire-sale prices, the outlook is so dreary that executives themselves don't want to engage in any dealmaking. Ernst & Young says M&A activity in mining fell 45% in the first quarter, as deal volumes dropped 35%.
Mining is a cyclical business, and the miners will eventually represent a good opportunity for investors to return, but like the shipping industry that chased growth and created a glut that still weighs heavily on the sector, mining pursued volume, which Pricewaterhouse says created inefficiencies that are "now structurally built into many mining operations."
That suggests the correction is not over and there are still new lows to be tested, even if there's no one around to see it.
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The article The Incredible Shrinking Mining Sector originally appeared on Fool.com.Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of Vale. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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