If buyer's remorse was a flu, then this would have been a full-on outbreak.
The week witnessed extraordinary confessions from repentant executives on deals struck at the height of the commodities boom.
Barrick Gold Corp. chairman Peter Munk recognized what everybody long knew, that buying Equinox Minerals Ltd., in 2011 at the astounding price of $7.3-billion, in cash no less, was a blunder of epic proportions. "That was my first mistake – entirely attributed to hubris," Mr. Munk confided to The Globe & Mail.
Mining giant Rio Tinto Group also owned up to its past mistakes. In an investment seminar, its chief executive, Sam Walsh, conceded the second largest miner had even toyed with the idea of reselling Alcan, the Montreal-based aluminium producer it acquired for $38-billion in 2007 in the midst of a crazy shopping spree. Close to $30-billion of that investment has since been written off. "We had lost focus on what really matters," Mr. Walsh said.
Then there is Chinese energy giant CNOOC. While its chief executive, Li Fanrong, said in September he was pleased with the acquisition of energy producer Nexen Inc., there are grumblings within CNOOC's walls. Nexen's troubled Long Lake operation is operating under capacity, and returns from the Calgary-based company are sub par, lamented its chief energy researcher, Chen Wei Dong. "That is a problem," he said to the Globe.
If those confessions were intended to make the pill any easier to swallow, it isn't working, though. The big retrenchment is in full swing, after falling commodity prices have changed the fortunes of producers. Companies such as Rio Tinto are making big cuts to their capital spending. Others such as Barrick are postponing projects or halting them indefinitely. And many are laying off employees in droves.
Take Potash Corp. of Saskatchewan Inc. The company will let go over 1,000 workers – 18 per cent of its work force – and halt production at its costliest mines as it struggles with plummeting potash prices following the breakdown of the Russian-Belarusian cartel.
Potash Corp. employees may now look with envy at Nexen workers. The federal government blocked the $38.6-billion (U.S.) sale of the Saskatoon-based miner by BHP-Billiton in 2010. In a bittersweet irony, Potash can fire as many employees as it wants, whereas Chinese-controlled Nexen has its hands tied. CNOOC had to promise to maintain its Canadian workforce to secure Ottawa's approval for its highly contested $15.1 billion (U.S.) takeover.
Question is, are Nexen employees really that better off? Extracting concessions and promises from foreign acquirers has been the way to go for Canadian governments sensitive to nationalistic concerns after a series of "Canadian champions" have fallen into foreign hands.
But while some of their provisions are useful, these agreements offer no iron-clad protection against a downturn in the commodities cycle and are, as such, more of a political façade.
Tellingly, even elected officials have been reluctant to enforce those agreements. When Brazilian mining company Vale bought Inco in 2006, its chief executive Roger Agnelli assured Inco workers in Sudbury there would be no change in the way they were treated, nor would there be layoffs for three years. But when the financial crisis sank the price of nickel, those promises vanished. Then Industry Minister Tony Clement toyed with the idea of intervening, but opted not to in the end.
Rio Tinto also made a series of promises in 2006 to the Quebec government when it acquired Alcan. To keep its cheap electricity and its loans, Rio Tinto had to maintain its aluminium headquarters in Montreal at levels comparable to those at the time of the transaction. It also had to complete its planned investments on schedule.
On both counts there is slippage. Rio Tinto Alcan has shrunk its employee base by 20 per cent since 2009. Those cuts have mainly focused on the head office, its chief executive, Jacynthe Côté, said this week. Over 700 employees work at the Montreal headquarters compared to 860 when the deal was done.
Alcan is also pushing back by three years, to 2019, the completion of its $2.1-billion investment in a new production centre in Jonquière. The Quebec government is going along with the new timetable unveiled in May. "We are giving them more time and flexibility … to complete their investments," Quebec Finance Minister Nicolas Marceau explained.
The reality is, Quebec doesn't have much of a choice. There is no point in arm-wrestling a company in a precarious position. The price of aluminium has fallen by a third since 2011, and now trades around $1,779 (U.S.) per metric ton. Rio Tinto Alcan has cut 600,000 tonnes of aluminium capacity since 2009. And yet, inventories remain high as many producers pursue money-losing production.