Resource Companies Reinvent Themselves for Tough Markets

Reinvention has long been a staple of the entertainment industry — when a once-hot singer or actor no longer grabs headlines, it’s time to recapture the public’s wandering eye with a change in genre, style or haircut.

Resource companies are now taking a page from that book by trying to grab investor attention with eyebrow-raising changes in staffing, strategy and even stock listings.

That’s because so many companies are spinning their wheels under torpid share prices that management teams in the resource sector are willing to try almost anything to break out of the current market malaise.

This situation was underscored last week by Rio Tinto’s (LSE:RIO,NYSE:RIO,ASX:RIO) surprise dumping of its CEO, Tom Albanese — a move that is widely seen as a bid to appease investors following a surprise $14-billion in write-downs on Rio’s aluminum and coal businesses.

Rio Tinto is not alone in putting forward new faces as a solution to investor angst. BHP Billiton (ASX:BHP,NYSE:BHP,LSE:BLT) is also looking for a replacement for CEO Marius Kloppers, The Australian reported last November, and Anglo American (LSE:AAL) recently announced that CEO Cynthia Carroll will likewise be given the axe.

New faces in new places

Of course, the spate of recent management changes at top mining companies has been couched by those firms as business optimization.

CBC News quoted Jan du Plessis, chairman at Rio Tinto, as saying that the company’s new CEO, Sam Walsh, is being brought in to “cast a fresh eye over how we address the challenges and opportunities in the business.” Du Plessis said he believes Walsh — known as a tough cost cutter during his time as head of Rio’s iron ore operations — will be able to “derive greater value” from existing operations.

Miners are thus making it appear that they are putting brighter, more capable people into positions where they will make a difference to business performance.

But often, dismissed executives — the people who are supposedly the reason firms are failing — show up later in new senior executive postings. That suggests the industry recognizes these firings as token moves for appearance’s sake rather than a comment on the abilities of the executives in question.

Ex-Codelco CEO Diego Hernandez, for example, was unemployed for all of two months after reportedly being driven out of that firm by its board of directors in May 2012. That August, Hernandez was hired as CEO by rival copper miner Antofagasta (LSE:ANTO), showing that his industry peers still firmly believed in his management skills.

Changes in strategy

When shifting people around doesn’t work to kickstart interest, some companies have attempted to revamp themselves using new business strategies. One of the latest examples is copper miner Freeport-McMoRan Copper & Gold (NYSE:FCX), which announced plans in December to get into the oil and gas business by buying Plains Exploration & Production (NYSE:PXP) for $20 billion.

The trend toward bold business ventures has actually been on the rise since 2011, when the post-2008 rally in stock markets fizzled and companies found themselves struggling to maintain their valuations. One of the first firms to go in a new direction to grab investor attention was the world’s largest gold miner, Barrick Gold (TSX:ABX,NYSE:ABX,LSE:ABG), which bought African copper producer Equinox Minerals for $7.6 billion.

The new strategy did little to help Barrick’s share price, which fell over 40 percent during the next 12 months (following which, the major also fired CEO Aaron Regent).

By late 2012, facing growing investor disillusionment with the gold sector, Barrick had, in fact, switched tactics completely. Instead of making acquisitions and growing production, the miner began steadily lifting its dividend payments in a bid to attract more conservative investors.

Barrick wasn’t alone in trying to reinvent itself as a payout-based production company. In July 2011, Newmont Mining (NYSE:NEM,TSX:NMC) raised its dividend by a muscular 50 percent.

Not just mining companies

Changing business strategies in the face of tough markets is not just a mining-sector phenomenon. The oil and gas business is also experimenting with new ways of attracting and keeping investor interest.

As pointed out by Oil and Gas Investments Bulletin, a number of junior exploration and production (E&P) companies have recently announced business strategy changes, moving from aggressive growth through drilling to a model featuring slower expansion and increased dividends.

Companies like Whitecap Resources (TSX:WCP) have announced that they will decrease their capital spending on drilling and facilities to around 60 percent of cash flow, paying out the balance to shareholders. Previously, most such companies were spending 100 percent (or greater in some cases) of cash flow on drilling, trying to grow production — especially in resource plays like the Bakken.

But with oil prices falling and wider markets sagging — and the field realities of some resource plays coming in below expectations — investors are growing skittish. E&P companies are trying to shore up buying with increased yields that will likely ring in around 5 to 10 percent.

Who needs the public?

It appears the next trick for public resource companies trying to reinvent themselves for the current markets may be by going private and forgetting about most of their investors completely.

A lot of rumors have been circulating lately about share price-dissatisfied management teams looking at backing out of their public listings. In confirmation, the first concrete going-private proposal emerged earlier this month, when Uranium One (TSX:UUU) announced that its 51-percent shareholder, Russian uranium miner ARMZ, is offering to buy out minority shareholders and delist the firm.

The move is a response to what ARMZ sees as the public market’s gross undervaluation of the company. The Russian producer is betting that even after paying a 32-percent premium on Uranium One’s recent share price — for a total buyout of about $1.3 billion — it can unlock significantly more value by advancing the company privately.

Uranium One’s management has agreed, recommending that minority shareholders accept the deal.

If the transaction goes through (it requires approval from two-thirds of minority shareholders), that could indicate that perhaps the only thing ordinary investors want today is to get out of their investments at a half-decent price while leaving larger, more sophisticated players to worry about the business.

 

Securities Disclosure: I, Dave Forest, do not hold equity interest in any companies mentioned in this article.

Related reading:

Codelco CEO Resignation Dampens Japan’s Interest in Chile

Freeport-McMoRan Takes a Dive as Investors Question Motives for Big Acquisitions

Virginia’s Coles Hill Uranium Deposit Faces Crucial Vote as Russia Takes Uranium One