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Economy

Mining companies face tough decisions despite the industry's rebound

Top execs eyeing the exits, under pressure from investors, investigators

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Aluminum Corp. of China last year acquired Rio Tinto's stake in the Simandou iron ore project in Guinea.   © Reuters

SYDNEY Big international mining companies like BHP and Rio Tinto made it through the crash in global commodity prices by slashing costs, shedding less productive units and taking full advantage of the economies of scale their vast operations provide.

Now, with prices moving up from the depths they reached in late 2015, Asia-linked mining companies are facing tough decisions about where to focus their attentions amid challenges from activist investors, allegations of corruption and environmental damage, and the imminent retirement of top executives.

Although analysts expect shares of BHP, Rio and rival Anglo American to outperform market indices this year, they say that in the current environment, capital discipline and technical expertise will be key. "The pattern of the past 10 years of chasing volume is out," said Paul Gait, senior mining analyst with Bernstein Research in London. "A new model is required, where technical, economic and financial scrutiny of projects is paramount. It's an opportune time for a change of guard."

BHP is facing scrutiny of its corporate structure and strategies from U.S. hedge fund Elliott Management. The fund launched a campaign in April for the miner to spin off its U.S. petroleum assets and streamline its current dual headquarters and dual stock market listings in Australia and the U.K., arguing that these moves would deliver better value to shareholders.

The Australian government soon objected to any diminution of BHP's Australian status as contrary to the terms under which BHP was allowed to merge with rival Billiton in 2001. "It is unthinkable that any Australian government could allow this original 'Big Australian' to head offshore," Treasurer Scott Morrison said on May 4.

BHP has not taken warmly to Elliott's proposals either, though Chief Executive Andrew Mackenzie met with fund representatives on May 17. The company argues that the costs of implementing Elliott's plans would outweigh the benefits, though it has said it will consider the sale of its U.S. shale gas assets in Fayetteville, Arkansas. BHP spun off alumina, manganese, coking coal and some other marginal operations into a new company called South32 in 2015, preserving a core focus on iron ore, thermal coal, copper, potash and petroleum.

Another issue facing BHP is that longstanding Chairman Jac Nasser will step down in July and no replacement has been confirmed. Nasser will leave behind unresolved problems, including uncertainty over the magnitude of the company's liability for a deadly dam failure in 2015 at its joint-venture Samarco iron ore mine in Brazil.

Other Asia-linked miners are facing similar leadership challenges. Jan du Plessis is set to leave the chairmanship of Rio Tinto by year-end to take up the same role at British telecoms operator BT. Rio has yet to identify a replacement.

Rio is embroiled in a crisis over alleged improper payments involving the $20 billion Simandou iron ore project in the African nation of Guinea. Last November, Rio Tinto fired the heads of its energy and minerals division and its legal and regulatory affairs department after emails came to light about a $10.5 million payment to a French consultant close to Guinea's president.

In March, Rio said it would defer releasing millions of dollars in bonuses to former chief executive Sam Walsh, pending further investigation of the Guinea payment. At Rio's annual shareholders meeting on May 4, du Plessis said, "It would be a mistake to conclude our challenges are getting any easier."

INDIAN CONNECTIONS Vedanta Resources, controlled by Indian tycoon Anil Agarwal, is on the hunt for a replacement for Chief Executive Tom Albanese, who previously ran Rio, after he said in March that he would step down by the end of August. Vedanta Resources is in the midst of merging Indian unit Vedanta with former rival Cairn India.

Agarwal in March invested $2.5 billion to become the second-largest shareholder in Anglo American, another multinational miner, with a 13% stake. Anglo American Chairman John Parker is set to leave by year-end to take up the same role with construction company Laing O'Rourke. The miner has not yet announced a replacement.

Chinese mining companies meanwhile continue to snap up assets from their Western rivals. Aluminum Corp. of China last year picked up Rio's stake in Simandou and was reported in May to have asked Guinean officials to be allowed to take over the whole project.

Canada's Barrick Gold in April agreed to sell half of its stake in its big Veladero gold mine in Argentina to China's Shandong Gold Mining for $960 million. Talks for a $1.3 billion deal between Barrick and Shandong Tyan Home, another miner from the same Chinese province, for a half interest in an Australian gold mine fell apart in April however, with Tyan citing increased government controls on offshore investments.

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