Mining Week 12/’12: Australian tax passed, but BHP warns for demand
March 24, 2012
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Top Stories of the Week:
- Australian Minerals Resource Rent Tax finally approved
- The tax on high profits for Australian iron ore and coal projects which led to a change of premier in the country was finally passed by the parliament last week.
- Officials from the mineral rich states of Western Australia and Queensland argued that the taxation should be a state arrangement rather than a federal law
- Many critics expect the MRRT not to bring in the amount of cash the governments expect because of tax management by the largest players and potentially because of lower profit margins as a result of increasing costs.
- Sources: Economist; Wall Street Journal
- Mixed signals on China’s iron ore demand
- In the same week BHP warned that China’s demand for iron ore is slowing down and the Australian state of Western Australia increased its outlook for exports.
- BHP still is bullish about long term demand in China and does not scale down its investment programs. However, in the short term the company ‘’gives caution” demand might drive down iron ore price to $120/t
- Sources: Wall Street Journal; BHP Billiton presentation; Financial Times
- Power struggle for Rusal amidst debt issues
- A new chairman was appointed to the board of Rusal and his predecessor, mr. Vekselberg, made public that the company was struggling with large debt problems and said it had management problems.
- Rusal announced that it would write down a large part of the value of its Norilsk stake in an attempt to restructure its balance sheet.
- Sources: Financial Times 1; Financial Times 2; Lex Video
Trends & Implications:
- Various of the large Russian miners are trying to diversify both in products and geographic presence. Key problems the companies appear to encounter are a clash of management and corporate governance styles between Russia and western investors and large debt burdens in combination with the need to reinvest most or all of free cash flow to modernize or expand.
- Australia basically kicked off a wave of mining taxation overhauls in countries around the world. Given the very large output of coal and iron ore operations in the country the implementation of the MRRT will be the most impactful for the overall profitability of the industry. As many of the new tax regimes are based on progressive operating margin scales and operating margins of most companies are decreasing because of cost inflation, it is questionable if the new regimes will result in the income countries are hoping for in the short term.
©2012 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
Australia, BHP Billiton, business, coal, iron ore, mining, mining business, MRRT, Norilsk, Queensland, Rudd, Rusal, Russia, tax, Vekselberg, Western Australia
Mining Week 10/’12: Xstrata buys coal, Molycorp goes downstream
March 11, 2012
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Top Stories of the Week:
- Xstrata buys more Canadian coking coal
- Xstrata buys the Sukunka coking coal deposit from Talisman Energy for $500mln in cash. The deposit holds 236 million tonnes measured and indicated resource. The non-producing asset is located in the same region as two other assets bought by Xstrata last year.
- Sources: Xstrata press release; Talisman press release; Financial Times
- Glencore/Xstrata merger debates
- While the merger antitrust investigations for the GlenStrata merger are getting started, the executives of both companies are going on a tour to Xstrata’s major shareholders to get buy-in. Several large shareholders (Standard Life, Schroders) have indicated they will vote against the deal at the current 2.8 shares of Glencore per share of Xstrata valuation.
- Sources: Financial Times; Bloomberg
- Molycorp integrates downstream with $1.3bln takeover
- Molycorp, the largest non-Chinese miner of rare earth minerals, made a takeover bid for Canadian processing company Neo Material Technologies, for $1.2bln. The deal will be paid roughly in roughly 2/3 cash and 1/3 shares. The strategic objective of Molycorp is to become a strong player in processing rare earths into semi-finished goods and to gain a strong foothold in exports to China.
- Sources: Molycorp press release; Wall Street Journal; Financial Times
Trends & Implications:
- The continued investment in iron ore and coal assets by both the major diversified miners and many smaller players is based on a belief that the long term demand for construction materials will increase for several decades driven by two main trends: global population growth (more persons), and resource intensity growth (more material per person). Rio Tinto’s latest iron ore presentation summarizes these two points in the pictures below:
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- The large mining companies reiterate these points every in every single investor presentation. Because many investors want to see more cash returned to the shareholdes in relatively uncertain times, the companies have to stress continuously that long term fundamentals look good and that large investments are needed.
©2012 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
business, Canada, coal, coking coal, GlenStrata, intensity, mining, mining business, Molycorp, Neo Material Technologies, population, Schroders, shareholders, Standard Life, Sukunka, takeover, Talisman, Xstrata
Mining Week 09/’12: Focus back to operational challenges
March 4, 2012
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Top Stories of the Week:
- Rio Tinto invests over $0.5bln on driverless trains
- Rio Tinto announced a large investment in its ‘Mine of the Future’ program to make the first of its approx. 150 trains on the Pilbara iron ore network driverless by 2014. The program will cost the company over $500mln, though it remains unclear what part of that amount is ‘research’ and what part is plain ‘hardware’.
- Sources: Rio Tinto press release; Financial Times; Sydney Morning Herald on union reaction
- Kazakhmys sees costs rise faster than revenues
- Kazakhmys, the Kazakh copper miner, posted flat profits as growth was offset by cost increase of over 20%, mainly due to skyrocketing labour costs in the country’s resource market. The company also made bullish statements about growth of the copper demand in China.
- Sources: Company overview; Financial Times; Reuters
Trends & Implications:
- Driverless trains are only one step in the larger automation effort for which Rio Tinto is the technology leader. Other areas of research are improving exploration performance and increasing recovery, especially from underground mines. A lot of the automation work focuses on the iron ore operations in Northern Australia. These operations have the scale to enable large savings by automation, and they struggle continuously with finding sufficient skilled employees at acceptable costs.
- Whether or not Rio Tinto’s role as the ‘technology leader‘ is a smart strategy is debatable: one might argue that begin a ‘smart follower‘, and thus not paying for the disappointments any large-scale research program holds, is more cost-effective. However, Rio Tinto has taken the approach that any research that can pay for itself in the long term is worth doing. Clearly the company will try to protect its findings as much as possible, but other companies will certainly start using its innovations in some way, reducing demand for skilled labor in remote positions and improving recovery potential.
©2012 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
automation, business, copper, cost, driverless, iron ore, Kazakhmys, Mine of the Future, mining, mining business, profit, Rio Tinto, trains, union
Mining Week 08/’12: GlenStrata’s antitrust & an Indian giant
February 25, 2012
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Top Stories of the Week:
- Glencore and Xstrata to seek merger approval in Brussels
- Despite earlier statements that Xstrata and Glencore would not need to seek approval from the European Commission the parties have now decided to submit their case for approval in Brussels.
- The companies argue that there is no significant increase in market domination because of the strong ties the companies already had prior to the merger.
- The European Commission will now have to decide on the potential restrictions to the new company, such as the obligation to sell certain elements of the business. A market density index calculation is used to see whether or not the new company would have a too dominant position. The big uncertainty in this calculation is how the Commission will scope the market or markets the companies are active in.
- Sources: Wall Street Journal; Financial Times; EU Merger Control Rules
- Vedanta merges Indian assets to create Indian mining giant: Sesa Sterlite
- Vedanta has decided to merge all its Indian assets, including Sesa, Sterlite, and Cairns India, into one big Indian company. This new Entity will be named Sesa Sterlite and will have a market capitalization of around $22bln. Vedanta will hold just under 60% of the shares.
- Sources: Times of India; Economic Times; Vedanta presentation
- Tavan Tolgoi plans to list in June
- The Mongolian government plans to list a significant part of Tavan Tolgoi, a large coking coal project in the south of the country, in both London and Hong Kong this summer. Regulatory issues threaten to delay the HKEx listing.
- The government plans to eventually hold 51% of the shares, give 20% to the population, sell some 10% to local business at a discount, and make the rest available to international investors. A significant part of the 20% given to the population might find its way to international investors.
- Sources: Wall Street Journal; FOX Business
Trends & Implications:
- The creation of Sesa Sterlite builds both a second diversified miner with a significant oil & gas business (next to BHP Billiton) and a second diversified miner with a significant interest in zinc (next to Glencore/Xstrata).
- If Vedanta manages to both make the merger integration of the 7 or more individual companies a success and to manage its investments in other developing countries successfully, it creates the primary candidate to become the stable Indian mining giant. Growth of the Indian industry is phenomenal but faces many challenges. The mixture of a very strong Indian foothold with high growth assets in many other developing countries could prove to be a good basis for risk diversification.
©2012 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
antitrust, Brussels, business, Glencore, GlenStrata, HKEx, India, IPO, London, mining, mining business, Mongolia, Sesa Sterlite, Tavan Tolgoi, Vedanta, XCore, Xstrata, zinc
Mining Week 07/’12: Results time and the Bumi story
February 19, 2012
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Top Stories of the Week:
- Friction between Bumi board and Rothschild
- Conflict arose in the board of Bumi, the Indonesian coal miner with the investor Nathan Rothschild as a large investor after a reverse takeover of the Vallar investment vehicle. After initial conflicts the Indonesian board members planned to remove mr. Rothschild from the board, but he now only appears to have to give up his co-chairmanship. Share price of the company dropped significantly after the news of the conflict.
- Sources: Financial Times; Wall Street Journal; Bumi’s overview of board members
- Annual results published without major surprises
- (Higher prices + higher costs) x lower volumes = lower profits. That was the story of the results releases of the world’s largest miners this week. The impairment taken by Rio Tinto on the Alcan acquisition costs probably was the most significant item, together with the relatively positive outlook given after the negative and uncertain signals given about global demand in the past months.
- Sources: Rio Tinto results presentation; text; Wall Street Journal on Anglo
- BHP (58%) and Rio (30%) expand Escondida at $4.5bln cost
- BHP Billiton and Rio Tinto announced investments of $4.5bln to replace the plant at Escondida, the world’s largest copper mine in output, increasing capacity and enabling mining restricted by the current facilities.
- Sources: BHP Billiton news release; Rio Tinto media release; Reuters
Trends & Implications:
- February is the month in which most of the world’s largest diversified miners present their annual results (only BHP Billiton runs a different fiscal year). The investor presentations provide interesting reading and give a good idea of the vision for the future of the industry. Below a peak preview with the most insightful slides from the presentations:
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- Anglo American – Price benefit achieved mainly in first half of year
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- Rio Tinto – 2011 in Summary: high prices are the only good news
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- BHP Billiton – Cost pressure is high, but not structural
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- Rio Tinto – Borrowing to pay out next to all investments
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- Anglo American – restarting the diversification discussion
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- Xstrata – Supply constraints lead to the Glencore merger
©2012 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
Rio Tinto, BHP Billiton, mining, Anglo American, business, coal, profit, mining business, copper, Vallar, board, Rothschild, Bumi, Bakrie, Escondida, cost, results 2011, Alcan, impairment
Mining Week 05/’12: Glencore and Xstrata move towards merger
February 5, 2012
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What is happening with Glencore and Xstrata?
- For several years Xstrata and Glencore, with over 30% its largest shareholder, have been linked in rumors of mergers. This week both companies released statements to announce that Glencore has now officially started the merger procedure. As a result Glencore is required to come up with an official proposal by early March. However, analysts expect an agreement to be reached much faster.
- Glencore is the world’s largest commodity trader and also owns operating assets for several commodities, most notably copper, zinc, and coal.
- Xstrata is the world’s 4th-largest diversified miner, grown rapidly in the past decade by a series of acquisitions.
- Last year Glencore became a public company, putting an official market value on the company. This step was seen as a requirement to convince Xstrata’s other shareholders to discuss a merger.
Why does a merger make sense?
- Although the mining industry only very slowly moves in this direction it makes sense to combine raw material production and marketing and processed goods production and marketing in one company. The vertical control over the value chain provides flexibility to react to sudden opportunities in the global marketplace. The 3 pictures below illustrate Glencore’s view of these arbitrage opportunities: geographical, product, and timing arbitrage. The larger the company is and the more overlap between marketing and production, the larger the rationale for merging. Estimated synergies of the Glencore-Xstrata merger are close to $1bln annually, mainly due to increased revenues (whereas most mining related M&A is driven by cost reducing synergies).
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What could go wrong?
Two important things could make the merger fail. The first could even prevent it from happening at all:
- 1. Antitrust - Glencore is the absolute market leader in trading of various commodities. Any increase of power in these areas would trigger action by antitrust regulators around the world. To get approved, the deal will have to be structured in a way that ensures both supply substitution and demand substitution; i.e. all market parties should be able to get around Glencore-Xstrata as customer or as supplier.
- 2. Corporate culture - Glencore is a company built on the two-thousand marketeers & traders, while Xstrata is run like a typical conservative mining company. Traders are typically very smart, aggressive, impatient, rational, office-workers. Miners are ‘roll up your sleeves’, ‘move the dirt’, operational guys with only very few of the highly schooled trading-types among them. To make these two groups of people not only work together smoothly, but to integrate the companies so that departmental interests and emotions are fully aligned with the larger companies objectives is going to be a major challenge, in which many employees from both sides might choose to leave the company to find a place where they are more comfortable.
©2012 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
business, copper, corporate culture, culture, Davis, demand substitution, Glasenberg, Glencore, merger, mining, mining business, supply substitution, trader, trading, Xstrata, Zug
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
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