Source: The Australian

Review of Under Fire BHP Billiton’s 2016 AGM: Jac Nasser to Leave on a Sorry Note

The Samarco dam disaster in Brazil continued to take its toll on BHP with the pending exit of Chairman Jac Nasser now confirmed. The disaster took place on November 5th, 2015, killing 19 people, and has been well documented here for its initial impact, here where the flooded vicinities are shown, and here documenting how protestors and representatives of victims of BHP Billiton’s mining projects not just in Brazil, but also in Indonesia and Columbia, planned to demonstrate outside the Company’s AGM in London.

The Bullish Bear caught up with the 2016 BHP Billiton AGM, and can confirm that representatives from Brazil and Indonesia were there and questioned the management incisively, to which the management replied with little more than platitudes and steps already put in place.

Some background: Samarco (Brazil) iron ore asset

Source: Company Annual Report FY 2016

The Samarco Mineração S.A., which operates the Samarco iron ore operation in Brazil, is held 50% each by BHP Billiton Brasil and Vale S.A. As a result of the tragic dam failure, operations at Samarco have been suspended, with no indication of reopening soon. Samarco’s main product was iron ore pellets. Prior to the suspension of operations, the extraction and beneficiation of iron ore were conducted at the Germano facilities in the municipalities of Mariana and Ouro Preto. In FY2016, BHP’s share of production was 5.2 MT of pellets (4% of Iron Ore production in revenue terms).

Impact and management steps

As at June 30th, 2016, BHP Billiton’s contingent liabilities registered a relatively small uptick from US$ 3.263 Bn a year ago to US$3.442 Bn, a figure which precludes “A number of matters, for which it is not possible at this time to provide a range of possible outcomes or a reliable estimate of potential future exposures.” Hmmm.. the potential potentialities!

Related reading: Is Deadly Dam Collapse BHP Billiton’s “Deepwater Horizon”? (The Motley Fool) >>

Equally noteworthy is that, despite insurance policies in place with Brazilian and international insurers, no insurance receivable has been recognized by Samarco for recoveries yet. Related to Samarco, BHP Billiton is externally insured for up to $360 MM, a figure which is dwarfed by the claims as below.

As at June 30th, 2016, BHP Billiton Brasil has identified contingent liabilities arising as a consequence of the Samarco dam failure as follows: (1) P&L: impairment charge of US$525 million, (2) Balance Sheet: Losses and provisions totaling US$ 1.2 Bn, (3) Environment and socio-economic remediation: An agreement with various authorities and partners to set up a Foundation, with funds of $ 134 MM initially (4) Legal: Various law suits including a claim brought by the Federal Public Prosecution Office on 3 May 2016, seeking approximately $48 Bn, (5) Commitment: a short-term facility to Samarco of up to $116 MM to carry out remediation and stabilization work.

These heady, heavy numbers aside, the management did take many steps, however. For example, (1) it took part in over 500 community meetings over the last year, (2) 41 programs were set up involving Samarco, BHP, Vale S. A. and the  Brazilian government, to focus on and rehabilitate social, economic and environmental impact of the accident, (3) A governance review of non-operating minerals joint ventures has been undertaken, (4) An expert panel’s investigative findings were released in August ’16 and also shared with other resource Companies, and (5) A global centralized dam management function was set up, with global tailings standards for design construction, maintenance of tailings and more frequent usage of independent safety reviews.

Another change was made after the December 2015 results: shareholder dividends were set at a minimum of 50% of underlying attributable profit, against a progressive dividend policy that sought to increase steadily or at least maintain half yearly dividends.

As for the earnings of CEO Andrew Mackenzie, they fell to half as he did not receive any performance-related pay in FY2016 – short-term and long-term  incentives were both zero. This was notably lauded by a keen attendee at the AGM, I noticed.


The failure of the tailings dam was blamed on construction defects in the base drain, while numerous warnings went unheeded

A Fundão Tailings Dam Review Panel was constituted by Cleary Gottlieb Steen & Hamilton LLP, which was retained jointly by Samarco Mineração S.A. and its shareholders, BHP Billiton Brasil Ltd. and Vale S.A., to conduct an investigation to determine the immediate cause of the November 5, 2015 Fundão tailings dam failure.

As I read the disclaimer on the website page here it clearly indicated that this was going to be less a fault-finding mission and more a technical, causation-investigative mission.

[A side note on tailings dam: A tailings dam in a cost effective structure to hold back the water from the mining area, contain the ground-rock tailings from the ore-milling and separation process and recycle the water to be reused in processing.]

It was originally planned to deposit sands behind a compacted earthfill Starter Dam, then raise it by the upstream method to increase progressively its capacity. To preserve the freedraining characteristics of the sands, a 200 m beach width was required to prevent water-borne slimes from being deposited near the dam crest where they would impede drainage.

An incident in 2009, shortly after the Starter Dam was completed, damaged the dam so badly that the original concept could no longer be implemented. This was “due to construction defects in the base drain.” A revised design followed in which more widespread saturation was allowed and accepted, increasing the extent of saturation introduced, which increased the potential for sand liquefaction. Sand liquefaction is a process whereby the material loses nearly all of its strength and flows as a fluid, which is what happened on the fateful afternoon of Thursday, November 5th, 2015, following the likely triggering event of three minor earthquakes in the region.

The foundation was laid, but the summary findings went on to highlight multiple indications and warning signs: (1) In 2011-12, “The 200 m beach width criterion was often not met,” (2) “In late 2012 when a large concrete conduit beneath… was found to be structurally deficient,” (3) During 2013, “Surface seepage began to appear on the left abutment setback at various elevations and times,” (4) By August 2014, “The replacement blanket drain intended to control this saturation reached its maximum capacity”, the saturated mass of tailings having grown meanwhile.

Related reading: A chronology of major tailings dam failures worldwide (WISE Uranium Project) >>

Alas, this narrative points to a pattern of operational negligence, which is what is making the victims, regulators and other stakeholders take action.

Returning to the goings on at the AGM, something else also caught my attention. BHP added this to its Charter (A one page leaflet with a few punchy dictums):

“We are successful when… Our teams are inclusive and diverse.”

Tacit admission of deficient decision-making?

By including the clause of inclusion and diversity in the Company’s Charter, we have a window into the minds of the management, into how they view a possible resolution to the mistakes made in this episode.

It is well-known from many studies [Kellogg, Essec, Houston Journal of Leadership, Skema Business School in France], that diversity boosts decision-making capabilities of a group.

“Our Charter… is the basis of our decision-making.” BHP Billiton Annual Report FY 2016, p. 39.

Reviewing the panel’s findings, it is apparent that despite many warnings, the management of Samarco S.A. continued its operations. Is the new mantra being introduced to improve this facet, and therefore, given the timing of this, is it a tacit admission that poor decision-making while reviewing key incidents through five years of the operation of the tailings dam at Fundão, was the most important cause of its failure?

The Bullish Bear tends to indeed think so.

Unlike The Guardian, BBC, the Financial Times, and many others, all of who suggest that the diversity program is for the sake of it or to improve performance: there is more to it than that. It is for a far more precise, strategic reason – to improve decision-making in high-pressure, high-stakes business scenarios.

Latest update: Brazil lays homicide charges over Samarco dam collapse, BHP Billiton rejects the charges outright (The Australian) >>

Mining industry yearning for clues in CPC’s latest 5-year plan

INSIGHT into the OVERSIGHT: “ China’s new 5-year plan brilliant news for mining”

As the CPC’s (Communist Party of China) perspectives on growth, consumption and investments shift, can we draw any definitive conclusions about the prospects for the mining sector, as is implied in this article?

Image courtesy: Yahoo! Finance

Leading Chinese mining stocks reacted rather negatively to the series of news releases by the CPC on 29th of October. On the NYSE, Rio Tinto opened 2.13% lower and BHP Billiton dropped by 3.28%, whilst over on the Shanghai exchange, China Shenhua Energy opened 2.43% lower.

The objective is not so much to criticize the article itself, but rather more to give clear insights into market and economic trends, in the face of large scale public policy interventions in markets and other regulatory affairs.

To effectively evaluate the substance and message of this article, we will discuss recent announcements by the CPC and key developments in the Chinese economy. Being the first stage in the general industrial production process, mining is heavily exposed to general economic trends. We will, therefore, take a look at the most important concern of the global mining sector today –global growth – or lack thereof.

MUCH ADO ABOUT NOTHING? The obsession with GDP

“Beijing’s decision to let urbanization happen at a faster pace and to stick to its target of “medium-high economic growth” and to double-down on a long-stated commitment to “double 2010 GDP by 2020” is the real kicker.”

The government recently decided to target “medium-high economic growth” in its 13th FYP over 2016-2020 after GDP expanded by 6.9% in the July-September quarter, slower than a 7% increase in the previous quarter. This is in contrast to the 6.5% rate of growth required from 2016 in order to achieve the said goal of doubling 2010 GDP by 2020: a high asking rate. In reality, there is a more pragmatist view emerging from the central planners in recent times. In July this year, President Xi Jinping alluded to a “new normal” in growth rates: not fast growth, but an improved economic structure that relies more on the services industry, consumption, and innovation. He has been quoted as saying, “Of course, speed [rate of GDP growth] is not the only thing we care about. Actually we are more concerned about indicators such as employment, residents’ income and prices.” [emphasis mine]. Premier Li Keqiang has also repeatedly downplayed its importance and instead emphasised the focus on job creation and consumer confidence.

“CONSUMPTION-LED GROWTH”, or forced-feeding?

Continuing to “raise consumption’s contribution to growth” is still an important plank and there is also a promise that “government will intervene less in price formation,” a clear reference to its botched stock market meddling earlier this year.”

If intervention in 1,700 stock prices has not worked, then how can it be certain that an attempt to raise aggregate consumption levels for 1.4 billion people will be successful? Decades of rising savings and investment levels can be a pointer towards increase in consumption-led growth. However, interventions in this area may, once again, fail. At the very least, this statement and the intentions behind it should be heavily scrutinized & researched further. The Xinhua press release (CPC vows less government price intervention) also contained bizarre oxymoronic statements from the CPC such as “The government will deregulate pricing products and services… and intensify targeted controls.”

Nevertheless, the overall emphasis was more akin to, “the government will cut red tape, delegate more power to local authorities and improve government services. To this end, China will try to overhaul state assets management, establish modern fiscal and taxation systems, and reform financial supervision.” The intention to move away from interventionary econ-management can only be welcomed: apparently, a true market-oriented reform.

Original article: China’s new 5-year plan brilliant news for mining ( >>

NO TO OPEN MARKET; YES TO PRIORITIZE & ALLOCATE (i.e. yes to excel sheets)

“Wording from 2013 that mentions the establishment of “a unified, open competitive and orderly market system” which would play a “decisive role in allocating resources” is gone from the latest communiqué. For the next five years government plans to “encourage better allocation of resources” and the country will “prioritize quality and efficient development,” but tellingly it’s no longer (only) up to market forces to accomplish this.”

At this point, the Bullish Bear has a confession to make: it is an avid, unbounded, unapologetic lover of free markets – human activity thrives on the back of the price mechanism and the trial & error process of the marketplace. Little surprise then that this brazen admission of central planning can only be derided. Market manipulation can and has led to tremendous costs at the very least, and sometimes, outright disasters. The government’s forced lending policies and its central bank’s loose monetary policies have attempted to cushion declining real estate prices, which is a huge concern for the banking sector – Fitch estimates banks’ total exposure to property could exceed 60% of credit if non-financing is also taken into account. The Chinese government also took desperate measures to stop the sliding stock market, formed out of excessive margin lending, which in turn was an outcome of the shadow banking system’s speculative frenzy with easy money in slowing economic conditions.


“The communiqué issued yesterday provides only the basic frameworks of programs and policies with a more detailed plan only made public in March.”

If this is true, then it perhaps belittles common sense to appraise the so called communiqué as a de facto framework. Whatever happened to a bit of conservatism in stance: a bit of equivocation, which would demand that the view be qualified and constrained, somewhat, albeit temporally..?

Government policies are very often critical as they set the agenda for markets, industries and the economy. But analysts very often jump the gun and underestimate the flaws of central planning and the power of market forces.

What this article has completely overlooked and is becoming a bigger widespread concern, is the fact that global growth has been slowing dramatically. Last month, the IMF warned that global growth may slow to lowest since the 2008 recession. The US economy grew 1.5% in Q3, lower than a 3.9% expansion in the previous period and below market expectations. And growth in the EU fell to just 0.1% last quarter after a near 2-year recession. Growth in Australian Mining Production, heavily linked to Chinese industrial production, has slowed down consistently over the last four quarters from 14.6% Y-o-Y growth in 2Q2014 to 3.7% Y-o-Y growth in 2Q2015.

The Chinese economic story will take its own course, and the government’s policies lack clarity and conviction. Above all, we need some patience so as to be in a better position to evaluate opportunities in the Mining sector, and indeed, in other sectors. Let the chips fall where they may – sans the artificial stimulants and inflammatory interventions!

Original article: China’s new 5-year plan brilliant news for mining ( >>