Archive
Mining Week 15/’12: Coal in Mongolia, no coal in Australia.
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
Chinalco not planning to sell Rio Tinto stake
“Chinalco, the Chinese aluminium group, has no plans to sell down its shares in Rio Tinto, viewing the mining house as a key strategic partner as Chinalco expands overseas. ‘We can’t go out to fight alone,’ said Chinalco chairman Xiong Weiping, explaining that co-operation with global miners was essential for overseas development. ‘With Rio being one of the top mining companies in the world, Chinalco can learn a lot from them, including in operational management, asset operation and risk management.’ Chinalco is seeking to move into mining to take advantage of the commodities bull run that has been created by China’s huge demand for raw materials such as iron ore, copper and coal. Mr Xiong outlined their plans to expand from their core aluminium business, which has struggled to make profits, into a global mining house. He said he was hunting for high-grade copper, bauxite, iron ore and coal resources, the minerals that China needs to fuel its urbanisation. ‘Our target areas are mainly countries next to China, for example south-east Asia, Mongolia and central Asia,’ said Mr Xiong.” Source: Financial Times, April 3 2011
Observations:
- Aluminum Corporation Of China Limited, Chinalco, and Chalco are often used interchangeably, as they are basically the same company. Chinalco is the state-owned holding company of Chalco, which is listed on various exchanges with a small part of ownership.
- Chinalco signals its interest in partaking in the Oyu Tolgoi copper project in Mongolia, which is operated by Rio Tinto. Until now Rio Tinto has held away potential contributors to the project.
Implications:
- With China’s mining sector growing in international importance it would be no more than logical if some of the largest diversified miners in the world in 10 years time are from China. In the domestic struggle to be this player state support will be crucial. Chinalco is positioning itself to be the Chinese diversified miner and desperately needs strong international connections to support this claim.
- In the short and mid term the strategic stake of the company in Rio Tinto certainly is a symbiotic relationship, as demonstrated by investments in Africa and exploration partnership in China. However, if Chinalco grows into an international diversified miner as it is planning, in the long term the companies will become fierce competitors. At this point the stake in the Australian company will certainly cause conflicts.
©2011 | Wilfred Visser | thebusinessofmining.com
Guinea to review mining licenses
“Guinea is planning a comprehensive review of its mining licences that could disrupt a $1.35bn iron ore agreement between China’s Chinalco and Rio Tinto, a $2.5bn iron ore acquisition by Brazil’s Vale, and a slew of smaller mining deals in the mineral-rich west African state. All mining companies in Guinea will have to submit to higher standards of transparency in order to invest, as will the countries from which they originate, according to a joint statement from Alpha Conde, Guinea’s new president, and George Soros, the billionaire philanthropist who advised him. ‘All contracts will be reviewed and reworked by the beginning of the second half of this year,’ said a senior official from Guinea’s ministry of mines at a conference in Paris on Thursday. ‘The government will become a minority shareholder in all mining contracts.’” Source: Financial Times, March 7 2011
Observations:
- According to the new licensing structure all foreign investors and their host countries will need to subscribe to the WorldBank’s EITI (Extractive Industries Transparency Initiative). Furthermore the government will request minority ownership of all projects.
- The most important mining project in the country is the iron ore complex around Simandou and Kalia. Rio Tinto and Chinalco, Vale, and Bellzone and CIF hold licenses to various blocks of the complex, from which production should start within 2 years.
Implications:
- China and Chinese companies, as brought in by Bellzone and Bellzone, don’t subscribe to the EITI yet. This could lead to significant development delays and/or break-up of consortia. It is unlikely that the government will push the large foreign investors out of the projects, as they need the foreign money to get the projects going.
- In the Economist’s country operational risk benchmark, Guinea ranks 149th out of 149 countries, tied with Iraq. The 10 risk categories included in the benchmark are: security; political stability; government effectiveness; legal and regulatory; macroeconomic; foreign trade and payments; financial; tax policy; labour market; and infrastructure. Next to the changing regulatory environment the infrastructure risk is important for Simandou’s projects, as Guinea and Liberia are fighting over the port to be used for shipping the ore and the way the ore should be transported to the port.
©2011 | Wilfred Visser | thebusinessofmining.com
The Most Influential People in Mining 2010
2010 has been an exciting year for the mining industry. The Australian Super Profits Tax debate came to a climax; the iron ore pricing mechanisms was changed to a system related to the spot market after 40 years of benchmark pricing; the Western Australian Iron Ore Joint Venture between Rio Tinto and BHP Billiton was cancelled; BHP attempted to acquire PotashCorp; 33 Chilean miners were at the center point of global media attention when they were rescued after 68 days underground. Who have been the world’s most influential people in the mining industry this year?
The Business of Mining.com gives a top 25. Based on a combination of metrics on ‘Opinion Impact’ (both public opinion and boardroom opinion) and ‘Decision Impact’ (both for 2010 and for the future). The list features a combination of industry leaders, politicians, journalists, advisors and regulators. 24 men; 1 woman. 5 Australians; 4 South Africans; 3 Chinese, 3 Americans; 2 Indians; 2 Canadians; 2 Brits; 1 Guinean; 1 Kazakh; 1 Mongolian; 1 Brazilian. The figure below gives an overview of the 25 most influential people in mining in 2010.
(Blue dots: industry leaders; green dots: journalists; orange dots: advisors; red dots: politicians; black dots: regulators)
1. Marius Kloppers – CEO BHP Billiton
Heads the world’s largest mining company. Tried to add potash to the portfolio of the company by (unsuccessfully) offering $39bln for PotashCorp of Saskatchewan. Earlier in the year not only played an active role in the debate about the Australian super profits tax, but also in the attempt to form a Joint Venture for iron ore export from Western Australia. Is furthermore seen as one of the key drivers behind the change of the iron ore pricing scheme.
2. Tom Albanese – CEO Rio Tinto
Heads the world’s third largest mining company. Worked with Kloppers on the Pilbara iron ore JV, the new pricing mechanism for iron ore, and the lobbying against the super profits tax as proposed by Kevin Rudd. Used 2010 to restructure the capital structure of his company and to strengthen the ties with Chinese industry and government via various deals with Chinalco.
3. Roger Agnelli – CEO Vale
Heads the world’s second largest mining company and largest iron ore producer. Less well-known in the west than Kloppers and Albanese, but certainly a powerful leader in the mining industry. Secured development opportunities in Guinea and in potash production expansions while carefully building relationships with the Brazilian government and the new president: Dilma Rousseff.
4. Tony Clement – Industry Minister Canada
The man that killed BHP Billiton’s hopes of acquiring PotashCorp by imposing unacceptable conditions in order to secure the deal’s ‘benefit for Canada’.
5. Cynthia Carroll – CEO Anglo American
The only women in the list, heading the fourth largest diversified miner in the world. Led the company back to profits after a dramatic 2009. Was appointed chairman of related Anglo Platinum this year and holds directorships of De Beers and BP. Furthermore plays a role in the debates about the future of the industry at the World Economic Forum.
6. Graeme Samuel – Chairman of the Australian Competition and Consumer Commission
Head of the regulating body that was the key obstacle for the Joint Venture between BHP Billiton and Anglo American to export iron ore from Western Australia as the JV would have given the two companies a position that would threaten global competition.
7. Michael (Mick) Davis – CEO Xstrata
Heads the world’s fifth largest diversified mining company, build rapidly by acquisitions under the helm of Davis. Proposed a merger with Anglo American in 2009, and continues to look for expansion options. Plays an important role in the debate around a potential merger of Xstrata with trading house Glencore, the company’s largest stakeholder.
8. Kevin Rudd – Former Prime Minister Australia
The brain behind the Australian super profits tax, designed to skim the ‘excessive profits’ of mining firms. The public debate around the tax was one of the reasons Rudd was not re-elected. Although not in the office anymore, the idea of the super profits tax was implemented by the new government in an adjusted form.
9. Julia Gillard – Prime Minister Australia
Benefited from the drop in popularity of Kevin Rudd to take over the position of Prime Minister of Australia. Did involve the miners in redesigning the law into the Minerals Resource Rent Tax (MRRT), eliminating its major shortcomings. However, the new law, which will become active in 2011, will drastically increase profits for the mining operations in Australia, forcing many mining firms to re-evaluate investments.
10. Jacques Nasser – Chairman of BHP Billiton
The man behind the scenes at BHP Billiton. Worked with Kloppers on all major events this year, including the super profits tax, the Pilbara JV, and the PotashCorp offer. Appointed former British Minister Shriti Vadera on the company’s board and prepared the decision to restart high dividend payments to shareholders.
11. Xiong Weiping – President Chinalco
12. Anil Agarwal – Executive Chairman Vedanta Resources
13. Partha Bhattacharyya – Chairman Coal India
14. Ivan Glasenberg – CEO Glencore
15. Mahmoud Thiam – Minister of Mines and Geology Guinea
16. Sukhbaatar Batbold – Prime Minister Mongolia
17. Brad Wall – Prime Minister Saskatchewan
18. Xi Jinping – Trade Minister China
19. Vladimir Kim – Chairman Kazakhmys
20. Duncan Sloan – Global Mining Lead Accenture
21. Mike Elliott – Global Mining & Metals Lead Ernst & Young
22. William MacNamara – Mining Analyst Financial Times
23. Robert Friedland – Founder Ivanhoe Mines
24. John Chadwick – Editor International Mining
25. Chen Yan – Governor China Development Bank
©2010 | Wilfred Visser | thebusinessofmining.com
The Rise of China in Mining
China is rising as a global superpower in the mining industry. Ore from mining companies all around the world is shipped to Chinese ports to fuel the growth of the economy. Building relationships with Chinese government and customers is a top priority for many business leaders. However, few people in the industry know that China itself is a major producer of many minerals. This article explores the Chinese rise of production, the rise of demand, the rise of Chinese mining firms and the rise of investment and sketches the implications for the mining industry of the changing role of the country.
1. The Rise of Production
China’s mining industry is the world’s largest in many aspects: the country has 200,000 collectively owned mines1, employing over 10 million miners; it is the world’s major producer of coal, lead, zinc, tin and rare earth minerals and also ranks high in output of iron ore, gold, bauxite and other minerals.
The country has been a major producer for decades, but the enormous demand, the opening of the market to private investors and the introduction of modern mining techniques has boosted the productivity and production of the industry. Significant reserves of most minerals allowed China to grow the market share of mining output for all major minerals in the past 15 years (Figure 1). The growth of the iron metal content output share is even more remarkable when considering that Chinese iron ore typically has a very low metal content: while share of iron content grew from 14% to 15% since 1995, the share of gross weight grew from 24% to 37%2.
Figure 1 - Chinese share of world mining output
The largest part of worldwide reserves of rare earths, titanium, tungsten & molybdenum are in China. These minerals are crucial in the production of many high tech products, giving China a powerful position in international trade. Recently the country has demonstrated this power by implementing export quota for rare earth minerals, favoring the domestic high tech industry.
2. The Rise of Demand
China hardly exports any minerals; all domestic mine production is absorbed by the domestic. Value of total mineral exports in 2009 was a mere $0.2bln, 60% of which was molybdenum3. Until a few years ago the country was a net coal exporter, but the growing demand from the utility and steel industry has turned it into an importer. Though the country does not export ores, it has been building a large iron and steel industry, exporting at a total value of $53bln in 2008. In the same year the production of 500Mt of crude steel accounted for 38% of the world production2. In 2009 the imports exceeded exports, as steel companies responded to the crisis by cutting production. Stepping up production will turn the country into a net exporter of steel again.
Sinochem in push to foil BHP’s Potash plan
“Sinochem, the Chinese state-owned chemicals group, is trying to recruit at least one sovereign wealth fund and a Canadian pension fund for a consortium to block BHP Billiton’s $39bn hostile takeover of PotashCorp of Canada. People familiar with the discussions said Temasek, the Singapore state investment agency, had been approached to join the consortium, along with several Canadian pension funds, including Alberta Investment Management, a pension fund with $66bn under management.” Source: Financial Times, September 8, 2010
Observations:
- Sinochem is reported to try to form a consortium to buy a strategic stake of PotashCorp to prevent BHP Billiton from acquiring the company. The Chinese company, backed by the Chinese government, is said to be afraid the targeted position of BHP would decrease stability of the fertilizer supply to China, which is crucial for the food security in the country.
Implications:
- Chinese firms appear to use the strategy of buying 10-20% stakes of companies that are about to be acquired in order to prevent the acquisition in case the deal is thought to be harmful to Chinese interests. Using this “divide and conquer”-strategy, Chinese firms try to limit the negotiation power of their suppliers.
- The advantage of state-controlled Chinese firms is the availability of large amounts of cash and the support of development banks, which helps companies like Chinalco and Sinochem to buy strategic stakes in suppliers. Clearly, the pockets of Sinochem are not deep enough to prevent the acquisition without help from other parties.
©2010 | Wilfred Visser | thebusinessofmining.com
Chinalco and Rio sign $1.35bn Guinea deal
“Aluminum Corp of China and Rio Tinto signed a $1.35bn deal on Thursday that allows the Chinese state-owned miner to buy in to a rich iron ore project in Guinea, in a move that places both mining companies at the centre of multi-billion-dollar scramble for west Africa’s iron ore. Rio and Chinalco – the common name of the Chinese miner – revealed few changes to the earlier agreement they signed in March over Simandou, the Guinean deposit. Chinalco will pay Rio $1.35bn that will fund project development. In return, Chinalco buys its way up to a 47 per cent stake in the Rio-Chinalco joint venture.” Source: Financial Times, July 29, 2010
Observations:
- Rio will mainly use the $1.35bln to finance infrastructure development, including a railway and port. Chinalco gains the access to the iron ore rights.
- Rio Tinto and Chinalco are hoping the Guinean government will exercise options to get 20% of the project shares. In this way Rio Tinto would be the lead partner and no other international firms will gain from the project.
Implications:
- Rio Tinto manages to improve the relationship with state-backed Chinalco after the setback of the unsuccessful increase of Chinalco’s share in the company in 2008. This relationship is especially important as China is the largest customer for Rio’s main profit pool: Australian iron ore. Although the size of this specific deal may be rather small, the political significance is ar stretching.
- Although access to the iron ore is important for Chinalco, the ore will be significantly more expensive than Australian ore, partly because of the larger shipping distance.
©2010 | Wilfred Visser | thebusinessofmining.com
Rio Tinto confirms Mongolian mine interest
“Rio Tinto has ended months of speculation by confirming plans to swap its shares in Ivanhoe Mines for a direct stake in Mongolia’s Oyu Tolgoi copper and gold project, which is 66 per cent owned by the Canadian miner. Rio owns an indirect interest in Oyu Tolgoi, one of the world’s largest undeveloped copper deposits, through its 29.6 per cent stake in Ivanhoe. The group also confirmed in a US Securities and Exchange regulatory filing on Wednesday that Chinalco, the Chinese aluminium producer that is its largest shareholder, was interested in investing in the Mongolian project, either directly or through buying an equity stake in Ivanhoe. The end result of the talks could be a two-way or three-way agreement between Ivanhoe, Rio and the Chinese company, Rio said in the filing.” Source: Financial Times, July 8, 2010
Observations:
- Rio Tinto could increase its stake of the Oyu Tolgoi operation to 47%, leaving Ivanhoe with 19%. 34% of the remaining shares are owned by the Mongolian government.
- The mine is planned to start operation in 2013, helping Rio Tinto to secure access to copper volumes, one of the key priorities in the company’s portfolio balancing.
Implications:
- Teaming up with Chinalco would both enable Rio Tinto to undertake more development projects with its restrained $5bln capital budget for the year and would strengthen the ties with Chinalco. Rio’s management has been working on strengthening the links with the Chinese state controlled company since early 2009.
- Rio Tinto is clearly more interested in Oyu Tolgoi than in the other Ivanhoe assets (Ovoot Tolgoi coal operations, Kazakh Kyzyl gold, Mt. Isa & Tennant Creek). As takeover options for Ivanhoe are limited, gaining direct control over Oyu Tolgoi appears to be the best option to increase control over operations.
©2010 – thebusinessofmining.com
