Monday, February 22, 2016

The Japanese Mining Giants Are Doing Fine

Following up on last night's "The Iron Ore Business In One Stock Chart".
From Bloomberg Gadfly:
Quick: What's the world's fourth-biggest mining business?

If you named a company with a major listing in London, New York or Sydney, you're out of luck. Measured by the gross value of its mining and energy assets, Japan's Mitsubishi Corp. outstrips Rio Tinto and Anglo American:...

... The country's sogo shosha trading houses are somewhat opaque to outsiders and tend to fly below the radar. But Mitsubishi, Marubeni, Itochu and Toyota's captive trading house Toyota Tsusho comprise four of the 20 biggest companies on the Nikkei-225 by revenue. Sumitomo Metal this week bought a $1 billion slice of the Morenci copper mine from Freeport-McMoRan, in the biggest mining deal since July. With a slew of assets up for grabs as miners attempt to rebuild their balance sheets, it's time the trading houses emerged from the shadows.

The business model is quite straightforward: the sogo shosha worm themselves into every transaction being carried out by corporate Japan, clipping the ticket on each stage of the supply chain that links raw materials to manufacturing, transportation, and finished products. Most have operations in mining and energy, finance and real estate, infrastructure, logistics, chemicals, food and consumer goods. In the commodities field, they already have stakes in coal and iron ore mines, copper pits in Chile and Peru, gas fields in Australia and Indonesia, and even a Mozambican aluminum smelter.

In these times, the sogo shosha have a crucial advantage over the Western mining and energy companies that operate most of their assets: Thanks to their diversity, they can shrug off even a historic slump in commodity prices and keep paying their debts with earnings from non-resource divisions. Mitsubishi's net income has fallen just 14 percent since its 2011 peak, despite a 94 percent slump in earnings from its metals unit.

If you believe, like Mitsubishi, that the current weakness in commodity markets is temporary, the current distress in the sector represents a historic buying opportunity for a well-capitalized company.
And the ambition is certainly there: The company wants to double production volumes in coking coal and copper by 2020 and end up with half of its assets in the energy and metals divisions, from about 42 percent now. Whether you imagine Mitsubishi keeping its asset levels in a steady state or increasing them at the long-term growth rate, a back-of-the-envelope calculation suggests that target will require about 1.3 trillion yen ($11.5 billion) to 1.4 trillion yen in resources investments over the period.

Mitsui also forecasts 1 trillion yen to 1.4 trillion yen of free cash flow over the three fiscal years to March 2017, according to a 2014 company presentation. About 30 percent of that total will be set aside for dividends, but the lion's share of the remainder will go to energy and metals projects, according to the company. Sumitomo is ready to buy or build new mines to meet its target of doubling gold output by 2020, company President Yoshiaki Nakazato said this week....MORE