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More resources write-downs expected as commodities slump

A steady flow of write-downs across most metals and oil and gas is tipped over the next year, as many of the mining majors tweak their medium-term price forecasts and try to offload non-core assets in a depressed market.

Glencore is a candidate to take hits in nickel and possibly other base metals at its interim results, analysts say.

If thermal coal prices continue to languish at $US60 a tonne, Glencore could also write down its Australian coal holdings over the next year, and Anglo American could impair some of its South African coal assets, but probably at the full year. 

Ahead of its interim results on Friday, Anglo flagged a writedown of up to $US4 billion ($5.42 billion), post-tax, on its Brazilian iron ore mine and some Australian coal assets, two days after BHP Billiton took a $US2.8 billion (pre-tax) impairment on its US shale gas business. 

UBS analyst Glyn Lawcock said he expected write-downs across most commodities, with miners that had recently executed mergers and acquisitions or built projects most at risk. 

Investors had expected BHP’s writedown on US shale to be considerably bigger. 

“Using forward [price] curves for other commodities there are probably other risks inside BHP, and other companies,” Mr Lawcock said.

Dropped dramatically

In the past 12 months, prices from copper to nickel to oil, coal and iron ore have dropped dramatically.

Miners could also take write-downs on assets they were trying to sell, to allow for lower price expectations. Deals have been thin on the ground, largely because the majors are not distressed sellers.

The majors have taken a steady flow of write-downs since 2013, and Ben Davis, a London-based mining analyst at Liberum, said they were unlikely to take many more “substantial” hits this year. The majors include BHP, Rio Tinto, Glencore, Anglo American and Vale.

But Mr Davis said given that nickel has been languishing at six-year lows of $US12,000 a tonne, Glencore’s Koniambo nickel mine in New Caledonia is “very much ripe for a write-down”.

“Given how long that has taken to ramp up, and how much the capex has exploded, that will probably be a material risk for them at these results,” he said.

Glencore could take impairments on some of the coal projects it had brought online most recently, but industry players said that would most probably be at its full-year results for calendar 2015 at the earliest, he said.

“It depends almost entirely on the commodity prices [forecasts] they end up choosing to use, which is something of a dark art to us.”

Glencore took a $US7.7 billion write-down in 2013 on the $US29 billion “merger” with Xstrata it executed the same year, with the bulk of that taken on goodwill. Glencore’s entire Australian coal business is under review.

Mr Davis is also tipping that some of Anglo American’s South African assets could be impaired. Anglo is trying to exit its thermal coal holdings in the country.

Fresh write-downs

Anglo took a $US3.9 billion write-down in February 2015, also on its Brazilian iron ore project, before announcing the fresh write-downs in June. Most of the latest write-down was on Brazilian iron ore.

Vale wrote down its Australian coal assets by $US1 billion in 2013 and in February 2015 slashed the book value of those assets by 71 per cent.

Rio sold its disastrous Mozambique coal acquisition in 2014 for $US50 million, after writing it down by $US3 billion.

Write-downs were of most interest if there was danger of them triggering balance sheet covenants – a negligible risk for the majors but a looming possibility for the like of Pilbara junior Atlas Iron.

Mr Lawcock said investors “look through” write-downs most of the time and often add them back in to calculate true capital returns.

“The market nine times out of 10 looks through write-downs,” he said.

“It goes more to reflection of what went wrong to drive them.

“Generally the investment community will add back write-downs to get to the true underlying returns that a company is generating, and they’ll say, well, you can’t just write something off and make yourself look good.”

Write-downs were a reflection of bad investment practices, where a miner had overspent to build a project and managed or priced it poorly up front, he said.

“And then there is M&A where you pay too much for something – and there are plenty of examples of that.”

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