Mining Week 04/’12: First test for Vale’s CEO vs. Brazilian government
January 29, 2012
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Top Stories of the Week:
- Vale starts to fight back against tax rulings
- Vale announced its plans to appeal to the governments intent to charge $5.6bln worth of taxes on foreign earnings. The clash with the government promises to be the first real test for the new CEO Murilo Ferreira.
- Mr. Ferreira took over the leadership of the company from Roger Agnelli, who was not reelected partly based on a disagreement with the government (which is control Vale via state-controlled shareholders) over $2bln taxation.
- Sources: Vale press release; Financial Times; Bloomberg
- Rio Tinto assumes full control of Oyu Tolgoi
- Rio Tinto increased its ownership of Ivanhoe from 49% to 51%, giving it full control over the flagship Oyu Tolgoi copper project in Mongolia, the world’s premier copper development project.
- Sources: Rio Tinto press release; Wall Street Journal; Financial Times
Trends & Implications:
- Vale estimates the impact of a review of the tax code on the company’s earnings to be approx. 4-5% of earnings. Taxation regimes around the world for specifically iron ore and copper mining are reviewed to make the countries benefit more from ‘extreme’ profits, which could be seen as a temporary phenomenon. However, the key issue in Vale is facing now is a debate about double taxation; paying taxes over profits after taxes realized in countries where the company is operating.
- Rio Tinto’s control over Ivanhoe will help the company to put in place its management structure and have the project managed by some of its top project developers. Gaining full control of the project in this stage will help Rio Tinto to build the project according to the company’s standards, preventing costly and above all time-consuming future transitions in the operating structure. The global standards that enable effective project management more and more set the world’s largest miners apart from the ‘small’ mining firms with only a few operating assets. Very much like GE has become known as a great ‘project management company’, the world’s largest miners are more and more developing into ‘mine development’ companies in which development speed is the key success factor and navigating politics in developing countries is a key skill.
©2012 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
Brazil, business, copper, development, double taxation, Ivanhoe, mining, mining business, Mongolia, Murilo Ferreira, Oyu Tolgoi, project, Rio Tinto, tax, Vale
Mining Week 03/’12: Record setting iron ore miners & dividend increase
January 22, 2012
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Top Stories of the Week:
- BHP Billiton and Rio Tinto deliver record production in Pilbara
This was another record-breaking year in the Pilbara with both quarterly and full year iron ore production. Record global iron ore shipments of 239 million tonnes in 2011 were below production due to extreme weather conditions experienced in the first half of the year. Despite this, Rio Tinto’s Pilbara ports operated at above annualised capacity rates and shipped record volumes of 61 million tonnes in the fourth quarter and 225 million tonnes for the full year.
While scheduled maintenance, tie-in activities and the wet season in the Pilbara are expected to affect Western Australia Iron Ore production in the second half of the 2012 financial year, full year production is now forecast to marginally exceed prior guidance of 159 million tonnes per annum.
- Sources: Rio Tinto press release; BHP Billiton press release; Financial Times
- Vale proposed a minimum dividend of $6bln for the year, an increase of over 50% versus the previous year’s minimum payment and in line with the actual dividend payment over 2011.
- Sources: Vale press release; Wall Street Journal; Financial Times
Trends & Implications:
- Rio Tinto and BHP Billiton continue to build capacity in the Pibara iron ore district. With relatively low mining costs and close proximity to the Asian/Chinese market this iron ore region is the most competitive (and largest) producer in the world. As the output in Pilbara is exceeding expectations and Chinese growth is slowing, exporters in other regions face an uncertain future. The global iron ore market is slowly evolving to a scenario where Brazil and Western Africa supply ore for the European market and the Latin American growth market, and Australia supplies iron ore for Asia.
- Vale’s increase of dividends fits in the trend of recent dividend increases in the industry and is a clear sign of uncertainty in the boardrooms of many companies: organic investment opportunities and development capacity are limited, share buybacks and cash takeovers would increase leverage and vulnerability, and with the uncertainty about future economic developments many companies decide to give the cash to shareholders in an attempt to keep share price high.
©2012 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
BHP Billiton, business, buyback, cash, dividend, iron ore, mining, mining business, Pilbara, Rio Tinto, share, Vale, weather
Mining Week 02/’12: Temporary & Permanent Cost Increases
January 14, 2012
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Top Stories of the Week:
- ENRC settles Congo dispute with First Quantum
- ENRC agreed to pay $1.25bln to First Quantum to settle the dispute over the Kolwezi Tailings project, the Frontier and Lonshi mines and related exploration interests in DRC. First Quantum was stripped of the rights to these projects by the government, after which ENRC came in and agreed to buy the rights from the government in a move widely criticized in the industry.
- Sources: ENRC press release; Financial Times; First Quantum press release
- Coal India agrees to salary costs hike of 25%
- Coal India, by far the largest miner of energy coal in the country, has agree to a 25% permanent increase of wages. In august of last year the unions demanded a 100% increase to offset increased cost of living and reduce the increasing income gap between management and workers. Investment bankers at the time expected the company to agree to a 15-20% increase. The salary hike results in an increase of operating cost for the company by approx. 10%.
- Sources: Wall Street Journal; Economic Times
- Weather in Australia and Brazil drives iron ore price up
- The closure of the export facilities in Port Hedland because of cyclone Heidi and the cancellation of shipments from Brazil because of heavy rains results in supply pressure in the iron ore market. Heavy rains are expected to continue in the Pilbara region, which supplies close to 40% of seaborne iron ore in the world, in the short term.
- Sources: Financial Times; Supply Chain Review; Wall Street Journal; Vale Press Release
Trends & Implications:
- Extreme weather conditions have a big influence on bulk material supply chains in the short term, because stockpiling these materials in amounts large enough to last for several weeks is very costly and thus not a normal practice. Especially the steel industry is hit hard with both iron ore and metallurgical coal having to be shipped in from locations that are often hit by storms. Although the impact on spot prices in the short term can be large, the longer term impact on the miners is quite small. Most contracts allow for some flexibility in when exactly the ore is delivered. As long as the mining operations don’t have to stop, the ore will get to the steel manufacturers as some point.
- The wage increase expected for Coal India is a good example of the very high cost inflation of mining in developing countries. Whereas the cost increase of contracted services and equipment leasing can be seen as (at least partly) a temporary phenomenon caused by high commodity prices, the cost increase because of increased labor and consumable costs in developing countries causes a more permanent shift of the global cost curves.
©2012 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
Australia, business, Coal India, Congo, copper, cost, cost curve, cyclone, ENRC, First Quantum, mining, mining business, supply, weather
Mining Week 01/’12: New year – Same fear
January 7, 2012
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Top Stories of the Week:
- Alcoa cuts aluminium production in fear of lower demand
- Alcoa announced shutdown of 532,000 tonnes of smelting capacity at the top of the cost curve to lower production costs and improve competitiveness. The 12% reduction of capacity mainly hits operations in the USA.
- Sources: Financial Times; Wall Street Journal; Alcoa news release
- Potashcorp temporarily closes a third mine because of low demand
- After recently temporarily closing down Lanigan and Rocanville mines, PotashCorp now decided to temporarily close Allan mine to because of lack of demand for fertilizer. The combined shutdown of the three mines results in approx. 1 million tonnes of potash, or some 10% of the company’s annual production.
- Sources: Wall Street Journal; PotashCorp Q4 market analysis report; text
- Unions in Canada and Zambia make their case for wage increases
- A union representing copper mine workers in Zambia signaled the foreign miners will have to agree to higher salary increases than the average offer of 11% to prevent widespread strikes. At the same time Rio Tinto Alcan and Caterpillar are taking a strong position against unions in Canada by locking out union workers after expiry of the negotiation periods.
- Sources: Wall Street Journal on Zambia; Wall Street Journal on Canada
Trends & Implications:
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The mining industry for the last 2 years has been and continues to be gripped by 2 paradoxical fears:
- The fear for slowing demand due to the lack of recovery after the financial crisis – With the financial crisis over 4 years old already the typical macro-economic cycle of 6-9 years has clearly been disrupted. Governments and companies are still operating in ‘crisis fighting’-mode because demand does not pick up like after a regular economic downturn. Large investments are still undertaken because the belief in the long term demand driven by population growth and growth of average GDP/capita is unchanged, but at the same time companies are trying to manage short term lack of demand by scaling down or temporarily closing operations.
- The fear for strikes and civil unrest resulting from struggling individuals facing mining companies that continue to realize high profits – Despite the financial volatility the commodity prices generally have remained high, making mining companies among the few companies in the world that continue to generate high profits. With people around the world facing the economic crisis and feeling its impact, friction develops between the rich companies and the less well off workers and neighbours.
©2012 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
Alcoa, aluminium, business, Canada, Caterpillar, cost, crisis, demand, fear, mining, mining business, PotashCorp, Rio Tinto Alcan, salary, strike, unrest, Zambia
Mining Week 52/’11: Chinese investment welcome in Australia
December 31, 2011
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Top Stories of the Week:
- Australia solicits Chinese infrastructure investment
- The government of Western Australia is trying to speed up the development of port and rail facilities of the Mid West region’s Oakajee port by stripping the Mitsubishi/Murchison combination of exclusive development rights and inviting Chinese parties to step in. 8 of the 14 projects in development in the region have Chinese investors.
- Sources: Wall Street Journal; Government statement; Murchison Metals statement
- Yanzhou teams up with Gloucester coal
- Yanzhou’s Australian coal company Yancoal will merge with Gloucester coal, 64.5% owned by Singapore-based Noble group. As a result Yancoal obtains a listing on the Australian stock exchange, a condition put on the 2009 acquisition of Felix Resources
- Sources: Wall Street Journal; Financial Times; Wall Street Journal blog on synergies
- Anglo and Codelco fight for Minas Sur stake
- Anglo American launched a range of claims in Chilean court trying to prevent Codelco from being awarded the right to buy a full 49% of the Minas Sur assets. The scope of the option for Codelco to buy 49% has been unclear since Anglo sold a 24.5% stake to Mitsubishi. In response to Anglo’s claims Codelco restated its intention to acquire 49% of the full project.
- Sources: Financial Times 1; Financial Times 2; Anglo American press release
Trends & Implications:
- As expected Chinese investments have proven to be a key driver of M&A activity in the mining industry in 2011. It is noteworthy that many Chinese firms are using a foreign based subsidiary or team up with a Western firm to do foreign investments. This structure holds 2 main benefits for the Chinese investors: they obtain an experienced western staff with knowledge of the way of doing business in the target countries; and they are viewed much more favorably by regulators when trying to execute deals.
- The fight of Anglo American and Codelco over Minas Sur appears to become a long term court fight. The longer this court fight stretches, the more inclined Anglo American will be to find a compromising deal, as the uncertainty about the ownership structure will delay all investment decisions for the company in the mining region.
©2011 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
Anglo American, Australia, business, China, coal, Codelco, copper, Gloucester, iron ore, legal, Mid West, Minas Sur, mining, mining business, Mitsubishi, Murchison, Oakajee, synergy, Western Australia, Yancoal, Yanzhou
Mining Week 51/’11: Grasberg back in business
December 18, 2011
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Top Stories of the Week:
- Freeport McMoran strikes deal on Grasberg
- Freeport reached a two year extension of the collective labor agreement at its Indonesian Grasberg mine after a 3-month strike. The new agreement holds a 40% wage increase over 2 years, improved benefits, and the promise to base wage future negotiations on cost of living and competitor benchmarks.
- Only days after the announcement of the agreement a helicopter transporting Freeport’s workers was shot at close to the mine, wounding one person.
- Sources: Freeport McMoran press release; Wall Street Journal; Financial Times
- Further coal consolidation in Australia
- Less than a year after being put up for sale and then declining all offers made Whitehaven teamed up with Aston Resources to create the largest listed coal mining company in Australia with $5.1bln market value. The deal is structured as a shares only acquisition of Aston by Whitehaven.
- Sources: Financial Times; Whitehaven merger documentation
- Anglo reassured in South African court
- The South African court ruled that the department of mines had no right to grant the mining rights of Sishen iron ore mine in the country to a junior mining company with strong ties to some influential politicians, but that instead the Kumba Iron Ore holds the rights to the mine. Kumba is majority owned by Anglo American.
- Sources: Anglo American press release; Financial Times; Wall Street Journal
Trends & Implications:
- The coal mining industry in Australia is still relatively fragmented, with both the diversified supermajors and many domestic listed and unlisted companies active in the industry. Because the mining districts are much less concentrated than the iron ore or gold districts of the country it is harder to achieve economies of scale that would justify many mergers. The deals taken place are mainly based on transportation and sales negotiation synergies.
- The Wall Street Journal published a good, readable, article this week describing the developments in the mining industry, signaling the combination of two key drivers this year: declining prices, and increasing costs. The resulting low margins will move the focus of many mining companies in the coming years to cost control. However, the winners of this cycle will be the companies that manage to invest during this period with lower profits to build capacity that will make them benefit from the structural increase in prices that will be caused by the structural price increases in the industry. Clearly not all cost increases are structural: equipment and contractor scarcity is mainly a temporary result of an overheated industry; but cost increases resulting from the move to harder forms of mining will stick.
©2011 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
Anglo American, Aston Resources, Australia, business, coal, copper, FCX, Freeport-McMoran, Grasberg, Indonesia, Kumba, labor agreement, mining, mining business, Sishen, South Africa, Whitehaven
Mining Week 49/’11: Changes at the top
December 4, 2011
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Top Stories of the Week:
- Vanselow quits as BHP CFO
- After 5 years as CFO of the world’s largest miner Alex Vanselow (Brazilian national) announced he will step down and look for a CEO position in the industry. Mr. Vanselow managed to get BHP through the economic downturn in great financial shape (helped by high commodity prices). His recent experience in acquisitions of Chesapeake assets and Petrohawk and the failed acquisitions of Rio Tinto, Potashcorp, and the failed Pilbara JV with Rio Tinto, make him an interesting candidate for any resources company looking to grow by M&A.
- Sources: BHP Billiton Press Release; Financial Times; Wall Street Journal
- Codelco and Anglo continue their copper fight
- In a legal fight over the rights to the Anglo American Sur project Anglo’s lawyers blame Codelco and the Chilean government to act unfairly. Codelco holds an option to buy 49% of the project, but it is unclear whether that is only of Anglo’s stake or of the total project.
- Sources: Financial Times; Anglo American Press Release; Codelco Press Releases
- BHP Billiton gets out of diamonds
- BHP Billiton announced it will review its options around its only diamond project: Ekati diamond mine in arctic Canada. Rio Tinto, which owns the nearby Diavik diamond mine, is the most likely buyer because of the synergistic potential and the lack of funds and abundance of capital spending needs of other large diamond miners.
- Sources: BHP Billiton Press Release; Financial Times; MiningMx
Trends & Implications:
- Mr. Vanselow will be an interesting candidate for global companies looking for a change of CEO. As Brazil’s Vale recently changed CEO and Petrobras’ Gabrielli de Azevedo is widely recognized as a strong CEO with work to do he will most likely look to head up a foreign player. The ideal period for a CEO is typically seen as 6-8 years: after that a new point of view and a new alignment with the personality needed for the phase of a company is often helpful. Taking a look at the top positions of the world’s largest miners at this moment, several CEO position changes can be expected over the coming years.
©2011 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
Anglo American, BHP Billiton, business, Carroll, CEO, CFO, Codelco, copper, Davis, diamonds, Diavik, Ekati, mining, mining business, Rio Tinto, Vanselow
Mining Week 48/’11: Change in Brazil & Tax in Australia
November 27, 2011
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Top Stories of the Week:
- Australia’s Mineral Resource Rent Tax approved by lower house
- The new 30% tax on profits above A$75mln for coal and iron ore projects has been approved by the lower house and is now only to be approved by the senate. The tax has been debated for approx. 2 years. Initially proposed by Kevin Rudd, the former premier, the regime has been tuned down and now includes arrangements to stimulate and protect investments.
- Sources: Wall Street Journal; Financial Times; Australian Treasury MRRT explanation
- Vale appoints new CFO: Tito Martins
- Tito Martins, Vale’s head of base metals, has been appointed as the new CFO of the company. Several executive management positions changed in the first major move of the new CEO to strengthen control. Mr. Martins was involved in the acquisition of Inco, which turned into Vale’s base metals division which was led by Mr. Ferreira.
- The change of top management of Vale was started by appointing Murilo Ferreira CEO in the place of Roger Agnelli after the presidential elections in Brazil. One of the reasons of conflict between government and Vale was the building of a fleet of iron ore carriers in Asia rather than domestically. This fleet was in the news this week as Chinese ports are refusing to host them, trying to protect the interest of incumbent shipping lines.
- Sources: Vale’s press release; Financial Times
- Rio Tinto bids for uranium explorer
- Rio Tinto convinced the board of Hathor Exploration, a Canadian uranium explorer, with a C$654mln bid. The bid is approx. 5% higher than rival Cameco’s bid. Hathor owns rights to various uranium deposits in the Athabasca basin.
- Sources: Financial Times; Rio Tinto press release; Hathor Exploration board recommendation
Trends & Implications:
- The changes at Vale should prepare the company for further changes to the business environment for the major iron ore producers. The introduction of the MRRT mainly hits Rio Tinto and BHP Billiton, but all three majors are figuring out how to react to increasing uncertainty about demand. Asian steel producers are pushing for adaptations to the recently changed pricing mechanisms, moving the pricing system to shorter term contracts. At the same time various Asian players are starting to buy iron ore assets in the price range of hundreds of millions to several billions of dollars; threatening the dominance of incumbents.
- Rio Tinto is trying to buy into uranium at a moment where industry shares are depressed because of the nuclear disaster in Japan last year. The bid for Hathor signals Rio’s management still believes in the potential of the industry. The company says it accounts for 16% of the world’s uranium production from mines in Australia and Namibia.
©2011 | Wilfred Visser | thebusinessofmining.com
Mining Week 46/’11: Hard times for emerging market multinationals
November 13, 2011
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Top Stories of the Week:
- Vedanta reports disappointing results
- Earnings of the industrial metals miner with many operations in India dropped despite revenue increase of 43% for the half year. Reduced earnings were caused by losses in the aluminium group and by a weak rupee (with 45% of revenue in India).
- Sources: Vedanta results presentation; Financial Times; Wall Street Journal
- Anglo and Codelco battle over Sur
- Only days after Anglo agreed to pay $5.1bln for a 40% stake of De Beers, it decided to sell a stake of its Chilean Sur copper project to Mitsubishi for $5.4bln. The sale has led to disagreement with Codelco, which claims to hold an option on 49% of the total project, not just on Anglo’s share.
- Sources: Anglo American press release; Financial Times; Wall Street Journal
- Caterpillar chooses to produce in USA and Indonesia, buys into China
- Caterpillar is adjusting its geographic footprint by buying a Chinese manufacturer of underground coal mining equipment and by increasing capacity of mining truck manufacturing in Indonesia and the USA. China’s enormous market is still predominantly using equipment from domestic brands.
- Sources: Caterpillar press release 1; Caterpillar press release 2; Financial Times; Wall Street Journal
Trends & Implications:
- Though the results for Vedanta were not met with enthusiasm on the markets, they were in line with the strategy set out by the management in May: growth, long term value, and sustainability. Vedanta currently chooses to increase its market share instead of generating high profits, in the awareness that the current development will for a large part determine which companies will be the emerging market multinationals of the future.
- The fight between Anglo and Codelco over the ownership stakes in the Chilean copper assets is flanked by a fight by Japanese co-investors and traders. Codelco sided with Mitsui to build its 49% stake at a low valuation, but Anglo found a way to get a higher price by selling part of the asset to rivaling keiretsu Mitsubishi.
M&A overview update
The M&A overview of the Business of Mining has been updated with Anglo’s 40% acquisition of De Beers.
©2011 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
aluminium, Anglo American, business, Caterpillar, China, Codelco, copper, India, Indonesia, mining, mining business, mining truck, Vedanta
Mining Week 45/’11: Anglo takes control of De Beers
November 6, 2011
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Top Stories of the Week:
- Anglo American adds 40% to its 45% stake of De Beers to gain control
- Anglo American agreed to pay $5.1bln to the Oppenheimer family to gain control of diamond miner De Beers. The other 15% are owned by the government of Botswana. De Beers changed CEO in May of this year and tried to strengthen partnerships and simplify the ownership structure.
- Sources: Anglo American press release; Wall Street Journal; text
- China: 8 die, 45 rescued in coal mine disaster
- A blast in a state-owned underground coal mine killed eight miners. 45 miners that were initially trapped underground were rescued within two days via a rapidly excavated tunnel.
- Sources: AFP; Wall Street Journal
Trends & Implications:
- Diamonds already accounted for 11% of Anglo American’s revenues, and will get close to 20% now. The simplified ownership structure will help De Beers to undertake the large investments in both new project development and modernization of current operations required to retain its leadership position in the global diamond business. Additionally, Anglo Americans global footprint will help De Beers to diversify its production footprint, which is still heavily skewed towards Botswana.
- Safety in Chinese mines is still far below Western standards, but under pressure of federal regulation the situation is improving rapidly. Unsafe mines are often forced to close temporarily, and rescue teams are becoming better equipped to safe the lives of trapped miners. Official numbers show a 2/3 decrease of fatalities in the past 10 years. However,the surge of coal demand in the country is putting the safety improvements under pressure, as mine management is willing to go a long way to increase output.
©2011 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
Anglo American, business, China, De Beers, diamonds, investments, mining, mining business, Oppenheimer, safety
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