Mining giant BHP pessimistic on iron ore, coal prices in next few years

BHP Billiton flagged on Wednesday that it sees no recovery in iron ore or coal prices in the next few years, while holding out hope for a rebound in copper and oil as it fights slumping earnings set to hit its long-protected dividend. 

PHOTO: REUTERS

JAN 20, 20162:10 PM

[MELBOURNE] BHP Billiton flagged on Wednesday that it sees no recovery in iron ore or coal prices in the next few years, while holding out hope for a rebound in copper and oil as it fights slumping earnings set to hit its long-protected dividend.

The top global miner reinforced the bleak outlook for most commodities in the near term, with markets slammed by oversupply as the economy slows in China, the world's biggest metals consumer.

In a sign the company may cut its dividend, ending a long-held policy to maintain or raise its payout every year, BHP Chief Executive Andrew Mackenzie said in a quarterly production report that it was focused on defending its investment grade credit rating. "In this environment, we are also committed to protecting our strong balance sheet so we have the financial flexibility to manage further volatility and take advantage of the expected recovery in copper and oil over the medium term," Mr Mackenzie said.

He made no mention of any recovery in iron ore or coal prices.

 

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BHP is reeling as oil prices have slumped further than expected at the same time as its other products have plunged to multi-year lows. Average prices for its commodities slumped between 20 and 51 per cent in the first half of its financial year compared to a year earlier, with crude oil worst hit.

BHP shares fell 4 per cent on Wednesday to their lowest in over a decade at A$14.14 as oil prices sank to their weakest since September 2003.

Analysts said the production report was largely in line with forecasts, adding that they were watching for further spending cuts when BHP reports financial results in February. "We have written that BHP will either need to meaningfully cut future capex or its dividend, and we stick to that view,"said Clarksons Platou analyst Jeremy Sussman.

As expected, the company trimmed its full-year forecast for iron ore output by 10 million tonnes to 237 million tonnes, following a dam burst at the Samarco venture in Brazil that killed 17 and devastated a nearby village.

BHP reaffirmed guidance for declines in copper, coal and petroleum output in the year to June 2016. It has slashed the number of rigs at its US shale fields amid the collapse in oil prices.

Copper output is still expected to fall 12 per cent to 1.5 million tonnes, metallurgical coal down 6 percent to 40 million tonnes and thermal coal down 2 per cent to 40 million tonnes from a year earlier.

BHP's oil and gas output, which sets it apart from other big miners, fell 5 per cent to 60.2 million barrels of oil equivalent (mmboe) in the December quarter. However it still sees full-year petroleum output at 237 mmboe, with offshore production helping to offset shale declines.

BHP produced 57 million tonnes of iron ore in the December quarter. Quarterly copper output fell 9 per cent to 400,000 tonnes because of lower grade ores at the Escondida mine in Chile.

REUTERS

    
 

US firms moving operations out of China: survey

One out of four US companies active in China has moved some operations out of the country or is planning to, as conditions worsen in the world's second-largest economy, an American business group said Wednesday. 

PHOTO: BLOOMBERG

JAN 20, 20162:38 PM

[BEIJING] One out of four US companies active in China has moved some operations out of the country or is planning to, as conditions worsen in the world's second-largest economy, an American business group said Wednesday.

Foreign investment has been a key part of China's transformation in recent decades, which has seen it become the workshop of the world and its largest trader in goods, but growth is now slowing.

It faces rising competition from rivals in Asia and elsewhere on labour costs, while the American Chamber of Commerce in China said more than three-quarters of respondents to its annual business climate survey - 77 per cent - said they felt "less welcome" in the country last year.

It was a significant jump on the 47 per cent in 2014, and came in the wake of wide-ranging monopoly probes that have targeted foreign firms, some of which have paid huge penalties to Chinese authorities.

"Some of the policies which are being considered or have already been enacted are fundamentally leading China in the wrong direction," said Lester Ross, the chamber's vice chairman.

Among the 25 per cent who have moved some of their capacity elsewhere in the last three years, or are planning to do so, the most common driver was rising labour costs.

But the chamber said almost one in 10 said they were doing so because of "regulatory challenges".

Almost half those switching - 49 per cent - moved their operations to other developing Asian countries, while 38 per cent went to North America.

US firms sometimes face controversy in their home country over operations in China, with accusations that they are exporting jobs, and some have moved capacity back in recent years, drawn in part by cost savings due to an energy boom and stable wages.

China's GDP grew 6.9 per cent last year, its slowest in a quarter of a century, government figures show, and the economy faces challenges including industrial overcapacity and a stagnant property sector, as well as stock market volatility.

Among survey respondents, 45 per cent reported flat or declining revenues last year, with only 64 percent saying their China businesses were profitable - the lowest proportion in five years.

The chamber's 18th annual survey had responses from 496 of its 961 company members.

AFP

    
 

Some bankrupt oil and gas drillers can't give their assets away

JAN 20, 20161:50 PM

[WILMINGTON] Oil is in free fall and Terry Clark couldn't be happier.

In mid-2014, when the crude price topped US$100 a barrel, Mr Clark made an offer to buy properties from Dune Energy Inc, a small driller with money trouble. Dune turned him down. A year later, as oil plunged to US$60 a barrel, Dune filed for bankruptcy and Clark's White Marlin Oil & Gas Co picked up the assets at auction at a deep discount.

"What we offered versus what we got it for, it's a great price," Mr Clark said. "We're going to continue to play these bankruptcies. We're participating in two more right now." Winners and losers are emerging from the energy bust. What's a meal for Mr Clark is indigestion for banks that financed the boom using oil and gas properties as collateral. The four biggest US banks - Bank of America Corp, Citigroup Inc, JPMorgan Chase & Co and Wells Fargo & Co - have set aside at least US$2.5 billion combined to cover souring energy loans and have said they'll add to that if prices stay low.

There's plenty to keep Clark bargain-hunting. Last year, 42 US energy companies went bankrupt, owing more than US$17 billion, according to a report from law firm Haynes and Boone.

Dune went belly up owing US$144.2 million. Its assets sold for US$20 million. In May, American Eagle Energy Corp. filed for bankruptcy with debts of US$215 million. Its properties sold for US$45 million in October. BPZ Resources Inc owed US$275.2 million. Its assets fetched about US$9 million. Endeavour International Corp. went into bankruptcy owing US$1.63 billion. The company sold some assets for US$9.65 million and handed over the rest to lenders. ERG Resources LLC opened an auction with a minimum bid of US$250 million. Response? No takers.

"A lot of people got into this business and didn't really understand the ups and downs of price cycles," said Becky Roof, a managing director for turnaround and restructuring with the consulting firm AlixPartners. "They're getting a very bad dose of reality right now." Eternal Energy More pain will come, according to Roof's firm. Crude prices, down 70 per cent since June 2014 and hovering in the US$30- a-barrel range, could head down further, an AlixPartners report said.

With its optimistic ticker AMZG - earlier incarnations were named Golden Hope Energy and Eternal Energy - American Eagle is classic shale. The last few years, the company took advantage of low interest rates and high oil prices, outspending its income and relying on debt to keep drilling. Now the company is part of the bust, selling off acreage for less than it owed its bondholders. Bradley Colby, American Eagle's chief executive officer, didn't respond to an e-mail seeking comment.

Samson Resources Corp. filed for bankruptcy in September, listing US$4.2 billion in debt. Its initial plan was to let lenders with claims on its assets take over, but unsecured creditors opposed the idea since, they contend, nothing would be left over for them. The company is still negotiating with its lenders. Brian Maddox, a spokesman for Tulsa, Oklahoma-based Samson, declined to comment.

"The reality is setting in as prices remain lower for longer," said Buddy Clark, a partner with Haynes and Boone in Houston, which represented Dune Energy in bankruptcy.

An attorney for BPZ Resources declined to comment. Representatives of Endeavour International didn't respond to requests for comment.

Cat Canyon ERG Resources owns nearly 19,000 acres in a century-old field about an hour's drive northeast of Santa Barbara, California. Called Cat Canyon, it was discovered in 1908 and has produced 300 million barrels of crude since then. ERG planned to squeeze more oil from the aging field. That was before prices declined. ERG declared bankruptcy in April owing about US$400 million, most of it to Beal Bank USA, a private lender based in Las Vegas. The company found no qualified buyers willing to pay its minimum bid of US$250 million.

Any money the business generates will be used to repay Beal before other creditors, said Mr Roof, who was ERG's chief restructuring officer.

Bankruptcies are accelerating. Magnum Hunter Resources Corp., Swift Energy Co and New Gulf Resources filed in December. With more liquidations hitting the market, bargain hunters may not be willing to pay top dollar when there are so many deals to be found.

The next test will be the auction of Quicksilver Resources Inc.'s properties, scheduled for Wednesday. The shale driller declared bankruptcy in March with more than US$2 billion in debt.

"So much of the frenzy in shale in the past few years was a result of the money pouring out of Wall Street," said Mr Clark of White Marlin. "It was as much a Wall Street play as it was an oil-and-gas play. It was putting money to work. Companies took on all that risk and now we see the result."

BLOOMBERG

    
 

Philippines plans to restrict access to cash-mopping tools

Policy makers are reviewing access to its liquidity- mopping tools "under the overall framework" of its interest-rate corridor, Governor Amando Tetangco said Wednesday. 

PHOTO: BLOOMBERG

JAN 20, 20161:37 PM

[MANILA] The Philippines plans to close a loophole in regulation of trust funds, by restricting those overseen by banks from parking short-term cash at the central bank.

Bangko Sentral ng Pilipinas is considering limiting lenders' trust units from placing funds in its short-term deposit facility, monetary board member Felipe Medalla said on Tuesday.

Policy makers are reviewing access to its liquidity- mopping tools "under the overall framework" of its interest-rate corridor, Governor Amando Tetangco said Wednesday.

Banks' trust units have undue advantage over non-bank trust groups that aren't allowed to put money in the central bank's special deposit account or SDA facility, and also over lenders themselves that must comply with the reserve requirement, Mr Medalla said in an interview.

Placements in the so-called SDA facility, which the central bank uses to control liquidity, totaled about US$16.8 billion as of December 29. The central bank is preparing to shift to an interest-rate corridor by the second quarter, a move intended to strengthen its policy tools.

Limiting fund managers' access to SDAs will make it a purely cash-mopping tool, said Eugenia Victorino, an economist at Australia & New Zealand Banking Group Ltd in Singapore.

In line with plans to shift to an interest-rate corridor system, "the central bank may be thinking of making SDAs a liquidity- management tool that should not be thought of as an investment vehicle."

At present, the central bank pays 2.5 per cent for funds placed at SDAs, compared with its benchmark rate of 4 per cent.

The 91-day Treasury bill fetched 1.684 per cent at the most recent auction.

BSP has tools to ensure liquidity growth is healthy and is seeking comments on the proposal, Mr Medalla said.

BLOOMBERG

    
 

KPMG withdraws audit opinions on CFTC over accounting error: documents

JAN 20, 201611:14 AM

[WASHINGTON] The US regulator that polices the complex derivatives markets is struggling to keep its own books in order and has made a material error that its auditor found so significant that it withdrew nearly a decade of its financial opinions, according to documents seen by Reuters.

The Commodity Futures Trading Commission understated liabilities by US$194 million in fiscal 2014 and US$212 million the following year, the agency's auditor KPMG estimated in the documents. The understatements are the equivalent to more than 75 per cent of the CFTC's US$250 million annual budget.

CFTC's management responded to KPMG's report by saying that it is investigating whether accounting rules were broken. It added that it did not concur with KPMG's findings and is still awaiting results of an official government audit, according to a series of documents exchanged between the CFTC and KPMG which were reviewed by Reuters.

It was not clear when the auditor became aware of the matter but in its response the CFTC said it had notified KPMG of potential issues involving its accounting in October. KPMG declined to comment.

At issue is how the agency has accounted for costs associated with leasing office space, the documents show.

Unlike some federal agencies, it does not own its own buildings and rents space in Washington, DC, Chicago, New York and Kansas City, Missouri. The leases generally cover a period of several years. However, in its annual financial statements, the regulator was only accounting for a year's worth of rent - and not the full cost of the lease over time.

A CFTC spokesman said the agency sees this as a technical accounting issue that does not affect current lease payments or its obligation to creditors.

KPMG alleges the CFTC violated Generally Accepted Accounting Principles, or GAAP, the accounting rules used in the United States.

The firm also said it is possible the CFTC is in violation of the federal Anti-Deficiency Act, which prohibits government agencies from obligating or expending federal funds in excess of the amount available.

KPMG's findings could add to the scrutiny of the CFTC, which already faces criticism from Republicans over its spending.

It won broad new powers from Congress in 2010 to police the lion's share of the derivatives market in the aftermath of the financial crisis, but some lawmakers have said it creates unnecessary regulatory burdens and have refused to grant the full budgets requested by President Barack Obama.

In a letter to congressional staff sent on Friday, also reviewed by Reuters, the CFTC's deputy inspector general said her office is removing copies of the firm's audit opinions from fiscal years 2005-2008 and fiscal years 2010-2014 from its website at KPMG's request.

These audit reports, she said, have been deemed"unreliable." The CFTC spokesman said Congress sought to address the historical accounting treatment for the CFTC's leases by adding language to a December omnibus spending bill to prevent the CFTC from ever being required to obligate the entire cost of a lease upfront.

This is not the first time leasing issues have come up at the CFTC. In 2014, the inspector general criticized it for wasting taxpayer money on underutilized office space in Kansas City.

The Government Accountability Office, a non-partisan government watchdog, is currently reviewing various legal issues surrounding the CFTC's leases.

A number of other federal regulators, including the Securities and Exchange Commission, have also in the past come under scrutiny over office leasing practices.

REUTERS