Global resources companies blow up US$40 billion of shareholders capital

Credit: iStock

As much as giant resources companies like to think they are good at capital allocation, 2015’s financial results prove they are anything but.

According to The Australian, between them, Glencore, BHP Billiton Limited (ASX: BHP), Anglo American, Rio Tinto Limited (ASX: RIO) and Vale reported impairments and other significant losses totalling close to US$30 billion – and that’s just for the 12 months to end of December 2015.

And if the companies report that those impairments and writeoffs are non-cash, they are only right in one sense and wrong in the only one that matters.

Accounting rules require them to write down the value of their assets on the balance sheet and take it through the income statement. As such, no cash actually changes hands or disappears. But shareholders should never forget that at some stage those assets on the balance sheet were purchased or acquired with real cash.

BHP wrote off US$8.37 billion, with US$7.18 billion of that coming from its onshore US oil and gas assets in the first half, but also wrote off another US$3.2 billion in the 2015 financial year, with US$2.8 billion of that again coming from its onshore oil and gas assets.

All up, BHP wrote off US11.568 billion in 2015, Vale an equally astounding US$9.37 billion, Anglo US$6.45 billion, Glencore lost US$8.1 billion, including US$7.1 billion in writeoffs and another US$1 billion loss on the sale of assets. Rio Tinto wrote off US$2.79 billion and BHP spinoff South32 Ltd (ASX: S32) wrote off US$1.7 billion primarily against its manganese and energy coal operations.

Company 2015 Impairments/writeoffs
BHP Billiton US$11.57 billion
Vale US$9.37 billion
Glencore US$8.11 billion*
Anglo American US$6.45 billion
Rio Tinto US$2.79 billion
South32 US$1.70 billion
Total US$40 billion

Source: Company reports
* Includes US$994m of losses on sale of assets

It’s not the first time the global resource giants have been forced to write off billions either – they’ve been doing it consistently for many years.

Rio wrote down the value of its US$38 billion acquisition of Alcan in 2008 over subsequent years by at least US$27 billion, and as the chart in this article shows, the company has consistently taken one off impairments and writedowns.

To be fair, resources companies don’t get to revalue their assets upwards when commodities price soar, but that truly would be a non-cash adjustment.

Foolish takeaway

The great belief that resources companies invest for the long term and make smart capital decisions has officially been busted. Shareholders have felt the pain too, with share prices for Anglo American, Glencore and Vale down on average by 50% over the past year, BHP’s share price has lost 44%, South32’s share price is down 35% and Rio is a relative outperformer, with its shares down just 25% according to Google Finance.

Invest at your peril.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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