To lose one chief executive may be regarded as a misfortune; to lose a handful looks like carelessness. The exodus at the helm of the world's biggest listed miners might have left some investors feeling slightly aggrieved, particularly if they interpreted the changes as tacit admission that management got it badly wrong on strategy. In the end, the cull extended beyond the top-tier miners to take in at least a dozen other large and medium-sized global entities. With the recent exception of the banks, it's difficult to recall such a widespread cull from a sector, but perhaps it heralds the return of a business culture that demands a little more scrutiny at the executive level - we can but hope.
New order
Rio Tinto (RIO), BHP Billiton (BLT), Anglo American (AAL) all lost their principals, along with Brazilian iron ore producer Vale SA, while Xstrata's long-serving chief executive Mick Davis was obliged to relinquish the top job in the wake of the Glencore tie-up, albeit with a sweetheart deal valued at around £75m in aggregate compensation and incentives. Even state-controlled entities haven't been immune to the blood-letting, with Diego Hernandez - erstwhile chief of Chilean copper giant Codelco - one of the first big industry names to go in May of last year.
Key institutional investors and independent board members turned the screw on executives who were deemed to have either overpaid for assets at the height of the mining boom (RIO/Alcan, AAL/Minas Rio), or stubbornly persisted with big-ticket capital projects even as commodity prices locked into reverse. Rio Tinto, alone, was forced to book around $34bn (£22bn) in asset write-downs since 2007, nearly three-quarters of which was linked to the purchase of Canada's Alcan - a deal that marked the start of Tom Albanese's tenure as chief executive and effectively ended it six years later.
The long road back
The old order may have gone, but investors will be entitled to wonder if the changes have come too late to restore earnings, or to free-up cash flows. A number of the new appointees, such as Rio Tinto's Sam Walsh, former head of the group's iron ore division, were chosen due to their operational expertise over their deal-making ability. The focus is back squarely on driving cost efficiencies, reducing gearing, and paring back capital expenditure wherever possible.
BHP Billiton's new CEO - former base metals head Andrew Mackenzie - could certainly be viewed as another utilitarian appointment. Expected operational efficiencies, along with new energy output coming on stream, underpins consensus forecasts for free cash flow (FCF) in 2014-15 of $7.3bn/$13.7bn (from a negative FCF of $5.8bn in 2012). At the moment there are limited share price catalysts for BHP on the horizon, although the hefty write-downs that the group took on its US shale assets now look rather severe. Nevertheless, because the Anglo-Australian's share price has held-up better than Rio Tinto's over the past quarter, its forward rating of 11.7 is now appreciably higher.
A marriage made in Helvetia
The first annual general meeting of the newly merged Glencore Xstrata (GLEN) effectively turned into a boardroom purge, as shareholders revolted against the bloated retention bonuses organised by former Xstrata directors - chief among them chairman Sir John Bond - which involved £170m in post-merger retention pay for 73 top executives, with another £44m in contractual payments, and a discretionary element of £25m in potential share awards. Sir John failed to muster shareholder support for his re-election, along with three other Xstrata board representatives, thereby reinforcing the influence of Ivan Glasenberg, Glencore's long-standing chief executive, and the seemingly ubiquitous Tony Hayward, who is acting as interim chairman. The removal of the last vestiges of Xstrata influence at the boardroom level belies the assertion that the merger was "a marriage of equals", while clearing the way for Ivan Glasenberg to thin-out layers of residual Xstrata management to accelerate cost savings.
In a forthcoming issue of Investors Chronicle we will analyse the combined business model of Glencore Xstrata, particularly with regard to whether the group's unique marketing/trading business model will give it a march over rivals during periods when commodity prices come off the boil. The merged group has just launched its first bond issue, with a portion of the $5bn proceeds earmarked for repaying outstanding debt. However, unlike its FTSE 100 resources rivals, Glencore Xstrata remains in the market for big-ticket strategic acquisitions, and another point worth considering is that Ivan Glasenberg and his management are unlikely to be quite as gung-ho with the company cheque book because their aggregate personal stake in the merged entity (24.9 per cent) should engender a degree of prudence. After all, it's always easier to pay over the odds with other people's money.
IC VIEW:
Obviously, the miners will need to complete the investment phase linked to large-scale projects such as Rio Tinto's Pilbara iron ore expansion, but it's reasonable to assume that a reduction in capital outflows, combined with proceeds from non-core asset sales, could eventually result in enough excess capital to generate a meaningful rise in dividend payments, or to facilitate more share buy-backs. Because of the changes afoot, we believe that investors will require a degree of patience, particularly given that the clamour for cash returns needs to be set against the tighter capital controls that are being put in place by the successors to Albanese, Kloppers, Carroll, et al. Short of any more write-downs, commodity prices provide the critical determinant for earnings going forward. Prospects for prices remain uncertain, with global economic indicators mixed at best. Anxieties with regard to China - the mega-miners' key export market - are particularly acute, with the HSBC Purchasing Managers' Index (PMI) for May slipping under the critical 50-point level that demarcates expansion from contraction for the first time since October.
