Mining Week 20/’12: Commodity outlook and potential US coal takeover
May 13, 2012
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Top Stories of the Week:
- Glencore and Rio Tinto fuel commodities outlook discussion
- Glencore’s Ivan Glasenberg joined his collegue at Noble group and Rio Tinto’s CEO Tom Albanese in stressing that there are no clear signs of a slowdown of Chinese commodities demand.
- Glasenberg stressed that inventory levels for many commodities are relatively low at the moment, contrary to the belief that increasing inventories should cause a drop of commodity prices somewhere in the next year.
- Sources: Financial Times; FT Video on Noble outlook; The Australian
- BHP Billiton rumoured to prepare bid for coal miner
- BHP Billiton is rumoured to prepare a bid for Walter Energy, a metallurgical coal producer with operations in the USA and Canada, and a project in Wales.
- Current market capitalization of Walter (WLT) is around $3.8bln, down roughly 50% from a year ago.
- Sources: The Telegraph; Wikipedia profile of Walter Energy; Bloomberg’s January analysis of potential takeover
- ArcelorMittal – Macarthur
Trends & Implications:
- A potential new takeover by BHP Billiton might be a good moment for BHP to announce writedowns on its acquisitions in the natural gas space. The acquisition of Petrohawk from Chesapeake last year is said to require a significant writedow as gas prices don’t seem to recover. Timing the market and combining the ‘exciting’ news of a takeover in the coal industry might partly overshadow the news of the writedown on the gas assets.
- The decrease of annual growth of the Chinese economy to single digit numbers is expected to impact construction and manufacturing activity in the short term, but the underlying outlook for the longer term continues to be a shortage of supply. Experts struggle to relate the overall economic growth numbers to short-term growth of construction sector, which drives most of the commodities demand.
©2012 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
BHP Billiton, business, Chesapeake, commodity, Glencore, inventory, mining, mining business, Petrohawk, Rio Tinto, takeover, Walter, Walter Energy, WLT, writedown
Mining Week 19/’12: Week of the Investors
May 6, 2012
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Top Stories of the Week:
- Xstrata’s investors voice GlenStrata concern
- In the re-election of Xstrata’s directors the vote against re-election of Ivan Glasenberg, the head of Glencore, increased from 3.6% last year to 13.6% this week.
- When voting on Glencore’s takeover offer for Xstrata a group of approx. 17% of shareholders could block the deal as 75% of shareholders excluding Glencore’s 33% needs to support the deal.
- Mr. Glasenberg indicated most of the debate on the merger currently is about the share ratio, which Glencore currently offering 2.8 shares per share of Xstrata.
- Sources: Financial Times 1; Financial Times 2; Xstrata shareholder meeting results; Xstrata notice on Quatar shareholding
- BHP Billiton and Rio Tinto return cash rather than invest more
- Both BHP Billiton and Rio Tinto stressed their commitment to dividend and buyback policies this week.
- Though reiterating the sustained belief in the long-term growth fundamentals of the commodities markets, the focus of the messages in investor presentations is shifting towards limiting and phasing investment, rather than growing as fast as possible.
- Sources: Financial Times; BHP Billiton Macquarie presentation; Rio Tinto Asian investors presentation
Trends & Implications:
- Miners currently focus on returning cash to shareholders because of the combination of short-term cost pressures that make margins shrink and longer term uncertainty about the pace of growth of global demand and the direction of metal prices. Citigroup’s forecast of a falling overall capex (see below in FT’s picture) shows uncertainty about how many of the projects in the current pipeline are really going to make it. Investments in star projects are still done, but the projects that could turn out to be marginal or lossgiving are on hold.
- Mr. Glasenberg’s comments about the share ratio discussion appear to indicate that Glencore’s bid for Xstrata might be sweetened if the deal runs the risk of not being accepted in Xstrata’s shareholder meeting early July.
©2012 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
BHP Billiton, business, buyback, capex, Citigroup, cost pressure, dividend, Glasenberg, GlenStrata, investment, macquarie, merger, mining, Rio Tinto, shareholders, takeover, vote, Xstrata
Mining Week 18/’12: Vale’s profits down; Asteroid mining up
April 28, 2012
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Top Stories of the Week:
- Vale profits down on
- Vale presented quarterly net earnings of $3.8bln, a 45% drop to last years 1st quarter. Revenues were down by approx. $2bln driven by both price and volume decreases. Slightly increased overall costs combined with lower volumes show an significant increase of unit costs.
- An iron ore price of around $120/t is the current market floor, according to Vale. Many low grade mining operations in China operate at costs around this price, making them go out of business and supply to drop significantly if prices would go below this point.
- Sources: Vale press release; Financial Times 1; Financial Times 2
- Gemcom acquired by Dassault
- Gemcom, one of the premier makers of mine planning software, is bought by Dassault Systems from a group of private equity parties. Dassault pays $360mln, while the private equity parties paid $180mln 4 years ago.
- Dassault has recently set up GEOVIA; a brand ‘to model and simulate our planet’. It is considering adding more packages to the brand.
- Sources: Dassault press release; Gemcom 2008 press release; Financial Times
- Planetary Resources unveils plans to mine asteroids
- Planetary resources, a startup company backed by an impressive list of investors including Larry Page, unveiled its plans to start exploration of asteroids with the objective of mining platinum, iron, nickel, water, and rare platinum group metals.
- An exploration station should be active by 2020. Timeline to bring metals back to earth was not given. Estimates of total investment to start producing start at $2.6bln, similar to the development cost of a large mining project.
- Sources: Wikipedia company info; Planetary Resources company website; Financial Times; Wall Street Journal
Trends & Implications:
- The innovative plans by Planetary Resources underline a growing drive to find alternative methods to obtain raw materials or to find substitutes for the raw materials we often take for granted. If bringing resources from space to the earth would succeed, this could fundamentally change the supply/demand dynamics of our conservative industry. And why would this not succeed? Especially for those materials where global demand is relatively small (e.g. platinum), this initiative should not be deemed impossible. However, futuristic it certainly is.
- Dassault’s move to set up a software branch specialized in the natural resources area is riding the trend of increasing importance of standardization and implementation of software tools to manage the portfolio of remote and often interlinked operations of mining companies. Software can help to produce production per employee, an important driver with the current shortage of qualified miners. At the same time the proper integration of operations and managing large parts of the design and operational work for operations from remote locations drives a need for software innovation.
©2012 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
asteroids, business, Dassault, Gemcom, Geovia, investors, iron ore, Larry Page, mining, mining business, Planetary Resources, planning, platinum, software, Vale
Mining Week 17/’12: The sense and nonsense of stock prices
April 22, 2012
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April is traditionally the month in which the major diversified miners present their annual results. BHP Billiton closes its fiscal year in the mid of the calender year, but joins its main competitors in giving an update of its performance in an investor meeting in this month. One of the key objectives of the executives presenting their numbers to an audience that will listen to each of the presentations in the course of a couple of weeks is to make the company look good, or at least better than competitors.
Managing the expectations of investors serves a twofold purpose: in the first place the goal is to make sure the investors know what they are investing in and what the perspectives for the company are – as a result the stock price should reflect the true performance and potential of the company; in the second place the goal is to keep the shareprice high or make it go higher – often referred to ironically as ‘reflecting the true value of the company’.
Why care about stock prices?
- Market value matters in the first place from a financial point of view. The higher the market price, the easier and cheaper it is to raise debt, giving flexibility to invest.
- The second important reason to care about the share price is the mergers and acquisitions arena. An undervalued company is an acquisition target, and having a strong share price makes doing paper acquisitions (pay with shares instead of cash) attractive.
Why not care about stock prices?
- Market value does not matter because an executive should not be driven by short term stock price fluctuations, which are typically mainly the result of market conditions and events the executives do not have a hand or a say in. In the long term good management will lead to a distinct outperformance of competitors, but short term movements are too erratic to say much about management performance.
- An executive should not be driven by the market price (i.e. the shareholders interest) alone, but should take the interests of other stakeholders (employees, society), which are often not directly or fully included in the share price, in account too.
©2012 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
Anglo American, BHP Billiton, business, employees, executive, market value, mining, mining business, Rio Tinto, share price, shareholder, stock price, Vale, Xstrata
Recycling & the Future of Mining
April 15, 2012
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For thousands of years the mining industry has supplied the world with the raw materials the growing population needed for ever increasing consumption. However, mining is not the only supplier of these raw materials. Next to the primary mining industry a secondary mining industry is growing: ‘urban mining’. The existing stock of materials in the urban environment is recycled more and more. 38% of iron input in the steel making process comes from scrap. The average ‘new’ copper cable contains some 30% recycled material. The more we recycle, the less we need to mine. As mining costs increase because ‘easy’ mineral deposits are becoming scarcer and as technological improvements make recycling more competitive, the impact of urban mining on the traditional mining sector grows. How does this change the perspectives of the mining industry in the long term? And which factors will play an important role in shaping this future?
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Mining Week 15/’12: Coal in Mongolia, no coal in Australia.
April 9, 2012
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Top Stories of the Week:
- Chalco bids for Mongolian coal miner
- Chalco (holding company = Chinalco) made a tentative $930mln offer for 57.4% ownership of SouthGobi Resources, a Canadian listed company, currently owned by Ivanhoe resources.
- Sources: Financial Times; Wall Street Journal
- Coal production issues in Australia
- BMA, the coal JV between Mitsubishi and BHP Billiton in Queensland, declared force majeure after a week long strike in some of its mines. The labor conflict has been going on for almost a year, with workers campaigning for better contract rights for contracted workers and to retain the union’s power in recruiting decisions.
- Sources: Financial Times
- Alcoa again cuts production
- Alcoa, the largest aluminium producer in North America, announced it would cut alumina production by 2% to support prices.
- At the start of the year Alcoa cut aluminum production, at that time by 12% and mainly in the USA. The 2% alumina cut is said to be aligned with this 12% ‘final product’ cut.
- Sources: Wall Street Journal; Financial Times; Alcoa press release
Trends & Implications:
- The potential Chalco – SouthGobi deal appears to be engineered by or via Rio Tinto. Chinalco owns a significant stake of Rio Tinto, which became the majority shareholder of Ivanhoe recently with the key objective of quickly developing the Oyu Tolgoi gold-copper mine (also in Mongolia).
- Despite a general demand boom which has not passed aluminum many major aluminum producers are posting losses. Profit margins over the past 10 years average below 10%. The key reason for this situation is an overcapacity resulting in oversupply and high inventory levels. Aluminium is currently one of the very few mined natural resources that could be seen as a ‘demand-driven’ market rather than a ‘supply-driven’ market for price setting. However, as more and more producers cut investment, the demand growth fundamentals should invert this situation in the next couple of years.
Alcoa's long term demand outlook as presented end of 2011
©2012 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
alumina, aluminium, BHP Billiton, BMA, business, Chalco, Chinalco, coal, copper, Ivanhoe, mining, mining business, Mitsubishi, Rio Tinto, SouthGobi
Mining Week 13/’12: Diamonds are not forever, neither are iron ore chiefs
March 31, 2012
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Top Stories of the Week:
- Rio Tinto puts its diamond division up for sale
- Rio Tinto started a ‘strategic review’ of its diamond business to explore divestment options for the 4 assets. The move comes only months after BHP Billiton announced it intends to sell its only diamond project.
- Rio Tinto was seen as the most likely buyer of BHP’s Ekati project because of the close proximity to it’s Diavik operation.
- Sources: Rio Tinto press release; Financial Times; Wall Street Journal
- BHP Billiton iron ore president quits; replaced by insider
- Ian Ashby, president of BHP Billiton’s iron ore division, announced he will step down in July. BHP will replace him with the head of the energy coal business: Jimmy Wilson.
- The leadership change comes during an aggressive investment program to expand capacity of the Pilbara operations.
- Sources: BHP Billiton press released; Wall Street Journal
- Indian privatization of coal mines backfires
- A leaked government report states that the Indian government missed out on $210bln by selling state owned coal assets to cheaply without having a proper auctioning mechanism in place.
- The hedge fund TCI, which owns close to 2% of Coal India, has started a process to sue the management of Coal India for allowing too much government interference related to the sale of assets.
- Sources: Financial Times; Times of India; Financial Times II
Trends & Implications:
- In March of last year Rio Tinto was said to explore a partnership with Alrosa, the world’s second largest diamond miner. This cooperation never materialized, and it appears Rio Tinto’s management has decided the iron ore business does not fit in its strategy of running large scale operations of traded minerals. With the presence of DeBeers and Alrosa it is unlikely that a third player will be able to invest to buy both Rio Tinto’s and BHP Billiton’s operations.
- India is one of the few mineral rich countries in the world that had to go through a large scale privatization program in the last years. Typically domestic investors who know the businesses and have access to influential officials manage to get good deals in buying assets (Russia is another good example). Often the real value of the formerly government owned assets only becomes apparent after a couple of years of operation in private hands.
©2012 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week, Uncategorized
Alrosa, Argyle, Ashby, BHP Billiton, business, coal, Coal India, diamond, Diavik, Ekati, India, mining, mining business, privatization, Rio Tinto, Wilson
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