Monday, August 13, 2012

Beverage Companies Pay Millions to Conserve Water

Story first reported from USA Today

WEST COLUMBIA, Texas – Fifty miles outside the nation's fourth-largest city is a massive field of waist-high grass, buzzing bees and palm-size butterflies, just waiting to be ripped up by a developer.

But rather than develop this pristine remnant of coastal prairie, vast enough to house more than 300 football fields, the Dr Pepper Snapple Group is investing hundreds of thousands of dollars to ensure it remains untouched.

The project is part of the company's $1.1 million investment in the Nature Conservancy, designed to benefit five Texas watersheds — including Nash Prairie outside Houston — from which its bottling plants draw water.

The money will go toward preservation, such as reseeding the grass, to restore and expand an ecosystem that once covered 6 million acres from southwest Louisiana through Texas. The projects will improve water quality and quantity by preserving the prairies' sponge-like attributes.

For Dr Pepper and other beverage companies engaged in similar work, the impetus is their bottom line — conserving water guarantees long-term access to the most crucial ingredient in their products.

"If there's not fresh water, there's no business — it's just that simple," says Laura Huffman, state director of the Nature Conservancy in Texas. "It is their number one infrastructure concern. … Water tops the list, above roads, above energy, above all else, because if you don't get water right, you're not making anything."

The biggest players — from Coca-Cola and Pepsi to Miller and MolsonCoors — as well as smaller, regional beverage companies, list water as a risk in long-term plans.

In 2006, 18 companies created an alliance called the Beverage Industry Environmental Roundtable to tackle water, energy and other issues that could affect the industry's growth. There is no total available for how much money has been invested in water conservation projects the past five years, but experts believe it's more than $500 million.

"At the heart of it … is their bottom line," says Thomas Lyon, a professor at the University of Michigan who researches connections between industry and the environment. "Water is a finite resource, and they desperately realize that it could become a major problem."

About a decade ago, when strategic planning started to highlight water constraints, many companies streamlined processes and installed more efficient technologies in factories and plants, conserving millions of gallons of water and millions of dollars.

About five years ago, the corporations began partnering with environmental groups, funding projects to bring water to people in developing countries, such as India, China and Africa, where water is most scarce and infrastructure is often deficient.

The partnerships help everyone: Environmental groups receive much sought-after funding; cash-strapped governments tackle projects they can't afford; and beverage companies can market themselves as "green" by conserving the most crucial resource on Earth and ensuring the future of their business.

While the companies are taking steps to conserve water and, in many cases, cut energy use and greenhouse gas emissions, they still contribute to a larger global problem: They bottle many of their products in plastic. By some estimates, 2.5 million plastic bottles are trashed every hour in the United States— and fewer than 30% are recycled.

Between 2008 and 2010, 69% of the alliance's 1,600 manufacturing facilities cut water use 9% — or 10.3 billion gallons, enough to supply New York City for eight days.

To combat the toll on the environment, Dr Pepper cleaned bottles with air instead of water on 56 production lines in 2010, and by 2015, it hopes to cut water use and wastewater discharge 10% for each gallon of finished product.

"As a beverage company, water is in everything we do, it's a primary ingredient," says Tim Gratto, Dr Pepper's vice president of sustainability.

Coca-Cola has committed to improving water efficiency 20% by the end of this year and becoming water neutral — returning to the environment any water used. The company is already returning 35%.

"We know the importance of water to the world and the planet, and we know the importance of water to our business," says Bea Perez, the company's chief sustainability officer, explaining that the company's long-term plans define water "as a life blood … but also as a risk."

For Pepsi, the wakeup call came when it laid out four possible scenarios for 2030 and discovered water was the greatest risk in each. Last year, Pepsi met its goal of becoming 20% more efficient by 2015, saving the company some $17 million in water expenses over five years, says Dan Bena, the company's director of sustainability.

Pepsi's other goal is to provide 3 million people with access to clean drinking water by 2015, and it has partnered with environmental groups to focus on rural areas in parts of the developing world.

Each day, Bena said, 200 million hours are spent hauling water to communities that have no plumbing — more hours than all employees at Wal-Mart, UPS, McDonalds, IBM, Target and Kroger work in a week.

If you free up that time, he said, people can work more, making money that could potentially be spent buying Pepsi products.

And for beverage companies, that's the point.

"If you don't address it, it's a significant risk," Bena said. "If you do proactively address it … you turn them into opportunities."

Most companies partner with environmental groups that have the scientific knowledge to guarantee success.

The partnership between Coca-Cola and the World Wildlife Fund expanded its focus in 2007 from rivers and streams near the company's Atlanta headquarters to preserving high-profile waterways, such as Central Europe's Danube River and the Yangtze, Asia's longest river, said WWF CEO Carter Roberts.

"As a society, we're going to have a huge crash if all these companies don't take action at the same time," Roberts says.

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Thursday, August 9, 2012

Anglo CEO Doubles Down on New Mines Amid Falling Demand

Bloomberg News:

Driving northeast from Santiago, the road corkscrews toward the shark’s-grin skyline of the Andes Mountains. In winter, Santiago’s smart set plies this route, heading for virgin-powder days and pisco-sour nights at La Parva ski resort. Most have no inkling that in a high mountain valley just over the ridgeline, excavators the size of houses have sculpted the mountainside into a steeply terraced pit 1,800 feet deep, Bloomberg Markets magazine reports in its September issue.

This is Los Bronces, one of the world’s richest copper mines. Anglo American Plc (AAL), the London-based company that owns Los Bronces, spent $2.8 billion from 2007 to 2011 to double the size of the mine. And Los Bronces is just one of four megaprojects that Anglo Chief Executive Officer Cynthia Carroll has initiated or pushed through construction since she took over in 2007 -- each representing a wager in excess of $1 billion on the continued rise of China, India and other emerging markets.

Los Bronces is also at the center of a legal battle between Anglo and Codelco, the Chilean state-owned mining company. The dispute -- over whether Anglo can block Codelco from exercising an option to buy half of Anglo’s Chilean subsidiary -- has spooked Anglo investors and weighed on the company’s share price, which dropped more than 15 percent from the time the controversy erupted in October to August 8.

Chile is just one trouble spot for Anglo American, which took in revenue of $31 billion last year from mining metals and minerals in more than 30 countries. Anglo also owns a 45 percent stake in diamond giant De Beers -- and has recently agreed to increase that stake to 85 percent.

Share Swoon

Anglo has spent or authorized spending of $21.7 billion in the past five years to ramp up production while simultaneously cutting billions in costs. Yet on August 8, Anglo’s shares traded at nearly 20 percent less than when Carroll became CEO and at 45 percent below their May 2008 peak.

Anglo angered shareholders by suspending its 2009 dividend rather than delay capital spending on Carroll’s four megaprojects: Los Bronces, nickel and iron mines in Brazil and an iron mine in South Africa. While the dividend has been restored, the stock has been hurt by the Codelco fight and by cost overruns and delays in Brazil. Profits in Anglo’s platinum mining division have fallen sharply. Most important, China’s economic growth has slackened, calling into question Carroll’s big bets and pushing down profits.

On July 27, Anglo announced that first-half earnings fell 46 percent to $3.7 billion. That day, the company’s shares fell 3.6 percent.

Merger Pressure

With Anglo’s stock in a swoon, the proposed merger of Swiss commodities trader Glencore International Plc (GLEN) with mining powerhouse Xstrata Plc (XTA), announced in February, had analysts speculating that Anglo might be ripe for a takeover. In 2009, the company rebuffed a bid from Xstrata. “It’s like a game of chess,” says Doug Blatch, head of equity trading at Investec Asset Management in South Africa. “It’s all about who makes the next move.”

Blatch cautions that Anglo’s underperforming business units and weakening demand from China make a takeover less likely than it seemed in February. Yet, he says, Anglo’s low valuation could make it a tempting target. Its market capitalization in mid-July was less than half that of London-based rival Rio Tinto Plc (RIO) and less than a third that of Melbourne-based BHP Billiton Ltd. (BHP)

Anglo isn’t interested in the merger speculation, says Carroll, 55, in her office with views of Big Ben and Whitehall in London.


“We’re not consumed with anticipation around Glencore- Xstrata,” she says, adding that the merger will not reshape the mining industry or affect Anglo’s competitiveness. “I don’t think it makes any difference whatsoever.”
Carroll’s appointment in 2007 shattered multiple glass ceilings at Anglo. She was the first woman, the first non-South African and the first person from outside the company’s own ranks to occupy Anglo’s top post. Born in Princeton, New Jersey, Carroll moved to Anglo after almost two decades at Canadian aluminum manufacturer Alcan Inc., where the mother of four rose to become president of the company’s primary metals group, a business with $10 billion in revenue and operations in 21 countries. She built and ran aluminum smelters, oversaw ingot sales and sold smelting technology.

Carroll holds bachelor’s and master’s degrees in geology, and she spent five years prospecting for oil and gas for petroleum company Amoco Corp. before enrolling in Harvard University’s MBA program in 1987.

Charming the Chairman

Carroll took over Anglo American from CEO Tony Trahar in March 2007, after Trahar, then 58, decided to step down earlier than analysts had expected. Anglo’s board conducted a hunt outside the company, and an executive search firm proposed Carroll, who coincidentally had charmed Mark Moody-Stuart, Anglo’s then-chairman, during a chance meeting at the World Economic Forum in Davos, Switzerland.

At Anglo, Carroll inherited a company undergoing a back-to- the-future transformation. Ernest Oppenheimer, the son of a German-Jewish cigar merchant, founded Anglo in 1917 to mine gold in South Africa’s East Rand, a hilly region near Johannesburg. During apartheid, currency controls forced the company to invest mostly within South Africa, and Anglo became a sprawling conglomerate with divisions in a dozen fields, from brewing to banking.

Following apartheid’s collapse in 1994, the company began selling non-mining businesses. In 1998, it also began spinning off its gold-mining operations and branched out of South Africa, acquiring mines in South America and Australia. It moved its headquarters and its primary stock listing to London in 1999 to attract global investors.

Byzantine Heirarchy

Almost a decade later, Carroll found Anglo burdened with a Byzantine hierarchy, she says. Within weeks, she eliminated the layer of three business unit chairmen that stood between her and the managers actually running Anglo. During the next two years, she replaced 12 of the 13 senior executives who reported directly to her.

In 2009, she began an efficiency drive that the company says has created $3.2 billion in value by, among other things, consolidating purchasing operations and tailoring products such as coal mixes more closely to customers’ needs. Carroll also eliminated 26,000 jobs across the company.

Carroll has reorganized Anglo around the mining of seven core metals and minerals: iron ore, metallurgical coal, thermal coal, copper, nickel, platinum and diamonds. Her plan is to put Anglo in a position to double production across this portfolio by 2020.


Much of Carroll’s strategy is predicated on the idea that the world is in the midst of a commodities supercycle: a rise in demand, lasting for decades, for all kinds of commodities in emerging markets. For the short term, that flies in the face of economic slowdowns across the map.

China’s gross domestic product growth has decelerated to a projected 8.2 percent for 2012, the slowest in 13 years, according to the World Bank. As a result, China’s demand for steel, once increasing at twice the rate of the country’s overall economy, is now lagging GDP growth, says Sebastien Boifort, a portfolio manager at hedge fund Passport Capital LLC.

China’s copper imports are down 30 percent from a December 2011 peak.

At the same time, India’s growth has fallen to less than 7 percent from 8.43 percent in 2010, while metals and mineral demand from developed economies remains weak. Anglo competitors Rio Tinto and BHP Billiton are scaling back on capital expenditures and selling noncore assets in response. On July 27, Anglo said its capital expenditures for 2012 would be $5.5 billion, 21 percent less than originally planned.

China Market

Carroll dismisses the idea that the slowdowns in China and India imperil Anglo’s strategy. She says that India, once thought to possess almost limitless iron ore, has begun importing it. China still needs steel, metallurgical coal and base metals to build up its infrastructure, she says.

Sharief Pansarey, an analyst at Old Mutual Investment Group in Cape Town, which holds about 2.4 percent of Anglo’s shares, supports Carroll’s overall strategy.

“They have great assets, so all that is really required is for them to see the projects through and then reap the benefits,” he says. “We feel comfortable with the upside as well as the risks.”

Carroll’s most expensive gamble is Minas-Rio, an iron ore project that spans the eastern Brazilian states of Minas Gerais and Rio de Janeiro. Anglo paid companies controlled by Brazilian billionaire Eike Batista a total of $5.1 billion in two transactions in 2007 and 2008 for the mine and the right to build an export terminal at the Atlantic port of Acu.


At the time, Anglo planned to spend an additional $2.6 billion completing the open pit mine, an ore processing plant, the terminal and a 330-mile (525-kilometer) pipeline to carry iron ore slurry to the coast. The project, Anglo said, will boost Anglo’s total iron ore output at least 55 percent when the first phase of production starts in 2015.

The project has run into a series of snags, and the completion date has been pushed back at least three years, to the second half of 2014. Officials from Brazil’s Public Ministry have obtained four injunctions against Anglo, challenging licenses for the building of power transmission lines and other facilities the company had been granted by regulators.

Anglo says the legal actions are without merit and it is seeking to resolve them through the courts. Carroll also met Brazilian President Dilma Rousseff on July 26 to try to smooth the path to the project’s completion.

Long Payback

Meanwhile, construction costs have jumped to a projected $5.8 billion.

Citigroup Inc. (C) analyst Heath Jansen estimates that Minas- Rio won’t pay back its capital costs until at least 2028. Anglo declined to comment on Jansen’s estimate.

“Minas-Rio is our single biggest disappointment in the company,” Pansarey says.

Peter Davey, an analyst at Standard Bank Group Ltd. in London, is blunter: “I think the thing that will make or break Cynthia is Minas-Rio.”

Carroll acknowledges the project has been more difficult than anticipated. Still, she bristles at suggestions from critics such as Jansen that Minas-Rio is a white elephant.

“They’ll be eating their words in a few years’ time,” she says.

Rising Reserves

While development costs have increased, she says, so too have estimates of the mine’s reserves, to 5.8 billion tons of ore from 1.2 billion tons. The mine will deliver ore to China at $55 per ton, a price competitive with that being sold by Brazilian miner Vale SA and Rio Tinto, she says.

“I don’t think the market understands this project,” Carroll says. “It’s not pie in the sky.”

Investors also fret about Anglo American Platinum Ltd. (AMS), or Amplats, Anglo’s platinum subsidiary. With a 40 percent global market share, the company is the world’s largest producer of the metal, which is used to make catalytic converters, fuel cells and jewelry.

Amplats employs 40 percent of Anglo’s 145,000-strong workforce and constitutes more than 25 percent of its assets. Yet the platinum business generated only 8 percent of Anglo’s profits in 2011, down from 28 percent in 2008. One reason is that demand from European automakers has been slumping, driving down prices. Platinum traded at $1,409 an ounce on August 8, 37 percent below its March 2008 peak.

Shuffling Deck Chairs

Investors are baying for radical action.

“If they are just going to reshuffle the deck chairs on the Titanic, that is a nonstarter for me,” Davey says.
He says Anglo must close low-margin platinum mines in South Africa. The country’s politics make that difficult. The company sold minority stakes in platinum mines to local businesses and communities to comply with post-apartheid black economic empowerment laws.
Peter Major, head of mining at South Africa’s Cadiz Corporate Solutions, which advises companies on acquisitions and divestments, says Amplats may be too big to manage inside Anglo American.
Carroll says the division isn’t for sale.

“This is not about spinning off platinum,” she says. “But we are looking at the entire value chain.”
In late July, after the platinum subsidiary missed its first-half earnings estimate, Amplats CEO Neville Nicolau resigned and the company announced it would suspend its dividend, curtail production and cut spending.

Unwelcome Blow

With Minas-Rio and Amplats weighing on Anglo, the Codelco dispute was an unwelcome blow. The controversy stems from Anglo’s $1.3 billion acquisition of Los Bronces, a second Chilean mine and a smelter from Exxon Mobil Corp. (XOM) in 2002.

Exxon had bought the assets from state-owned mining company Enami in 1978. Exxon feared the government might nationalize foreign-owned resource companies. So to protect itself, it gave Enami an option to buy 49 percent of Exxon’s mining company. The option could be exercised every third January.

When Anglo bought Exxon’s mining unit, the option, with slightly changed terms, transferred to Anglo’s Chilean subsidiary, Anglo American Sur SA.

Enami sold the option to Codelco in 2008.

Anglo tried to buy Codelco’s option, offering the state- owned miner $1 billion in August 2011.

“We rejected it on the basis it wasn’t enough,” says Codelco CEO Thomas Keller, who was chief financial officer at the time.

Codelco Option

In October 2011, Codelco announced it intended to exercise its option in January of this year, using a $6.75 billion loan from Japan’s Mitsui & Co. toward the purchase. Under the deal’s terms, Codelco could repay Mitsui $4.9 billion of the loan in shares equal to 24.5 percent of Anglo American Sur. Codelco would thus be getting a quarter of Anglo Sur for as little as $1.9 billion.

Carroll announced on Nov. 9 that she had completed a better deal. In a move that she said would protect shareholder value, she sold 24.5 percent of Anglo Sur to Japan’s Mitsubishi Corp. (8058) for $5.4 billion. That valued the subsidiary at $22 billion, double the price implied by Codelco’s option.

Codelco sued. Anglo countersued. Initial attempts at negotiation failed. The dispute looked like it was headed for a years-long journey through the Chilean courts. The court case is now suspended while the parties make a new attempt to reach a settlement.

Anglo’s market value declined by $7.3 billion from the time the dispute broke out in November 2011 to August 6.

Right and Wrong

“Regardless of who’s right and who’s wrong, I think the concern is, how did you end up in this situation in the first place?” Citigroup’s Jansen says.

While the Chilean government has said it won’t intervene in the dispute, Dominic O’Kane, an analyst at Liberum Capital Ltd. in London, worries that it will damage Anglo’s standing.

“The longer the dispute drags on, the greater the political risk,” he says.

The latest bad news for Carroll is a sudden and unexpected drop in demand for rough diamonds. De Beers reported on July 20 that sales fell 14 percent in the first half compared with the same period in 2011. Profit was $626 million, a 47 percent decrease.

The timing couldn’t be worse for Anglo, which agreed in November to buy the Oppenheimer family’s 40 percent stake in De Beers for $5.1 billion. The purchase will bring Anglo’s ownership to 85 percent. The nation of Botswana owns the other 15 percent. Through De Beers, Anglo will control 35 percent of the global market for rough diamonds.

Steel-toed Boots

If diamonds are no longer Cynthia Carroll’s best friend, copper and iron ore may be her nemeses. In late June, she flew to South Africa’s Northern Cape to christen Kolomela, an iron mine Anglo spent three years developing at a cost of $1.1 billion.

The mine is part of Anglo’s effort to increase South African ore production to 70 million tons from 40 million tons. As she entered the mine site, Carroll passed lines of rail cars, each loaded with 100 tons of ore, stretching 2 miles into the distance.

Mine workers sang a song composed for the occasion as Carroll gamely danced on an outdoor stage in her black pantsuit, hard hat and steel-toed work boots. She smiled at an audience that included buyers from Chinese, Japanese, South Korean and European steel companies.

The buyers call the tune, and Carroll has to hope that the music doesn’t stop.

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Is Local Food More Equally Friendly?

Story first reported from USA Today

Which is better for the environment and the economy — a tomato grown nearby or one from the supermarket?

Local food, hip among urbanites and touted at the White House, is stirring more debate as new research suggests its benefits have been oversold.

"I like the food," says Joseph Conklin, a customer at the Local Market, a store in Falls Church, Va., that sells products made within 100 miles. He says he wants to support local businesses: "You get a better feeling shopping here" than at a national chain.

Such stores are popping up nationwide, and more farmers markets are open year-round. First lady Michelle Obama has added to momentum with her well-publicized backyard garden.

Two new books, however, say local food isn't necessarily more eco-friendly, even though it travels fewer miles. They cite research showing long-distance transportation accounts for only about 4% of the greenhouse gas emissions in food production; most occur at the farm itself through the use of tractors and other equipment and materials.

So if you want to buy local food for its freshness or to support area farmers, fine, but don't do it to save the planet, conclude researchers from the Union of Concerned Scientists, an environmental group. Their two-year study, "Cooler Smarter," was published this spring.

Another book goes even further in debunking local-food "myths." Its title, The Locavore's Dilemma: In Praise of the 10,000-mile Diet, plays off Michael Pollan's best seller, The Omnivore's Dilemma.

Co-author Pierre Desrochers, a geography professor at the University of Toronto-Mississuga, says large farms growing crops suited to their region are better for the environment because they use less energy per item and grow more food on less land. He says they offer economic benefits, too: lower prices.

Desrochers, who says he has received no funding from agri-business, has no problem with hobby farmers but doesn't want government supporting local food (or, for that matter, ethanol and sugar). Though kids may learn from community gardens, he says, they're better off learning computer and job skills.

"He's advocating a contrarian stance to sell books," says Chris Hunt of Sustainable Table, a non-profit advocate for healthy, eco-friendly food. Hunt says local food may not have a smaller carbon footprint but argues small local farms are more likely to avoid synthetic hormones, fertilizers or other chemicals that can damage the environment and harm human health.

He agrees it's not feasible to rely entirely on local food but adds, "no one's proposing that."
Erin Barnett, director of Local Harvest, a directory of farms and farmers markets, says local food encourages people to eat fresher, seasonal food and offers an easier way to track safety problems.
As part of its "Know Your Farmer, Know Your Food" program, the U.S. Department of Agriculture offers grants to boost local food systems.

"Some of this is schmaltzy," says David Swenson, a regional economics researcher at Iowa State University. "How about your mechanic?" He agrees there's more economic benefit in growing large quantities of food where the climate is best: "That's why Iowa is so good at growing corn and Montana (stinks) at it."

Yet local food is about more than numbers, says Sarah Rich in Urban Farms, out in June. She toured 16 nationwide, including a one-acre rooftop garden in Queens, N.Y., and found that they anchor communities, beautify blighted areas and create havens for children. "Urban farming … can simultaneously reshape places we live and the way we eat."

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