Top Stories of the Week:
- Freeport McMoran faces strikes in Indonesia
- About half of the workers at Freeports’ Grasberg mine went on strike to demand higher pay, forcing the company to shut down operations. Several strikers have been killed by police and unknown gunmen in the past week.
- Sources: FCX press release; Financial Times; Wall Street Journal
- Rio Tinto sells aluminium, buys uranium
- BHP shops for iron ore in Brazil
- Junior miner Ferrous Resources, worth just over $3bln, is looking for a buyer. BHP Billiton and a Chinese company are talking with management to negotiate a price.
- Sources: Financial Times; Fox Business
Trends & Implications:
- Freeport’s social troubles in Indonesia are the latest labor issue in a rise of labor unrest in the latest year after years of relatively peace in the industry. The unrest mainly affects copper producers, which have seen profits rise with high copper prices, but did not want to increase worker’s compensation too much to secure long term competitiveness.
- The large diversified miners are increasingly focusing their attention on a limited number of extremely large operations, divesting smaller operations. With the spending power of the ‘mining supermajors’ a divide seems to open between the few operators of the world’s key supply areas and the many operators of a range of smaller operations.
- Rio Tinto might face challenges selling the unwanted aluminium assets in one package. Very few companies are able to do acquisitions worth over $7bln, and many of the companies that have the spending power might face antitrust limitations.
©2011 | Wilfred Visser | thebusinessofmining.com
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Categories: Mining Week
Tags: aluminium, Bakrie, BHP Billiton, Brazil, Bumi, business, copper, Ferrous Resources, Grasberg, Hathor exploration, Indonesia, iron ore, mining, mining business, mining week, Rio Tinto, strike, uranium
“Zambia’s new government has suspended metal export permits as it prepares new guidelines for the sector of Africa’s biggest copper producer. The decision followed concerns that copper exporters had not been paying their full duties to the state and is seen as an attempt to improve transparency in the industry. But it is also the latest in a number of sweeping measures by President Michael Sata’s administration, including the threat of higher mining taxes, as he looks to stamp his mark on the country after winning September 20 elections.
Frederick Bantubonse, general manager at Zambia’s Chamber of Mines, the industry body, said he was ‘terribly worried’ by the suspension. ‘At the current copper production level, you are talking over 2,000 tons of copper per day … you have contracts with exporters, you have contracts with the transporters,’ he said. However, an official at the Ministry of Mines and Minerals Development said the guidelines were merely following a presidential directive that all exports need to be cleared by the central bank.”
Source: Wall Street Journal, June 3 2011
Observations:
- Zambia’s new president promised to strengthen control over the country’s mining sector, responding to unrest in the country about the actions of foreign mining companies.
- Zambia accounts for approx. 5% of global copper production with a significant potential to grow. First Quantum’s Kansanshi copper mine is among the world’s top 20 in terms of output. Only one-tenth of the tax revenue comes from copper, though three-quarters of export earnings are from copper.
Implications:
- Resource nationalism is a key issue in the mining business this year, driven by high commodity prices and economic uncertainty. Just this week the news featured Vale’s potential agreement with the Guinean government about Simandou ownership and the request and withdrawal of the same request of Mongolia’s government to review the ownership of Oyu Tolgoi, developed by Rio Tinto.
- The concerns of the chamber of mines about contractual obligations with exporters and transporters are not very fundamental. All the parties in the mining value chain benefit from high copper production, making it easy to find a modus operandi while the uncertainty lasts. However, the industry in Zambia will have to prepare itself for negotiations about higher taxes as the new government will try to gain popular support by transferring more of the profits from the country’s natural resources to the people.
©2011 | Wilfred Visser | thebusinessofmining.com
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Categories: Market change
Tags: business, Chamber of Mines, copper, copper belt, duties, exports, First Quantum, Kansanshi, Michael Sata, mining, mining business, Wilbur Simusa, Zambia
“China’s Minmetals Resources has launched a C$1.3bn (US$1.25bn) takeover offer for Anvil Mining, a Toronto-listed copper producer, in a move that underscores the rising international profile of Chinese mining companies.
Chinese miners have been slowly but steadily advancing their overseas presence, as China’s consumption of key commodities such as copper, gold and coal continues to grow.
Minmetals announced Friday it would offer C$8 per share for Anvil in a friendly deal that has the approval of Anvil’s board and major shareholder, Trafigura Beheer. The price is a 30 per cent premium to Anvil’s 20-day trade-weighted average.”
Source: Financial Times, September 30 2011
Observations:
- Minmetal’s made a bid for Equinox in April, but withdrew this offer after Barrick offered a higher price.
- Minmetals acquired many assets of OZ minerals in Australia in 2009. Its mining division MMG is mainly managed by western managers and operates mines in Australia and Laos.
- Anvil’s most important asset is the Kinsevere copper project in Congo, which is expanding to a 60,000tpa capacity and has proven and probable reserves of approx. 750 thousand tons contained copper.
Implications:
- Anvil’s board informally put the company up for sale last month although it is in the process of a fully financed expansion program. Analysts expect the move to be driven by the large shareholders that want to cash in on their investment.
- Minmetals will continue to look for $1-7bln copper investments in Southern Africa, trying to expand its portfolio and potentially build on the experience of Anvil’s management. According to the Economist stability in the Katanga copper region is uncertain as the strong governor of the province has decided to leave the office next year. Congo’s copper assets will certainly be in the center point of attention in the coming year.
©2011 | Wilfred Visser | thebusinessofmining.com
Categories: Mergers & Acquisitions
Tags: acquisition, Anvil, business, Canada, China, Congo, copper, mining, mining business, Minmetals, MMG, Trafigura
“Mining companies are waiting anxiously as Michael Sata, Zambia’s new president, settles into office, wary that the former opposition leader may put past threats against foreign investors into practice now that he has been elected. Rupiah Banda, the incumbent president’s gracious acceptance of defeat in last week’s vote paves the way for a democratic transition, still something of a rarity in Africa.
But it has also triggered unease among investors in Africa’s biggest copper producer. Any mining policy changes would affect a host of international companies – including Glencore, First Quantum, Barrick Gold and Vale – which were expected to invest billions of dollars in the sector over the next five years. The jitters are caused partly because Mr Sata, 74, and his Patriotic Front are relatively unknown quantities. Mr Sata has gained a reputation for populist attacks against investors and complaints that Zambia’s resource wealth has not been adequately distributed.”
Source: Financial Times, September 25 2011
Observations:
- Some of the largest mining operations and prospects in Zambia are Barrick/Equinox’ Lumwana copper projects; Metorex Chibulama copper mine; Vale’s Konkola north copper project; CNMM Muliashi copper mine; and Collum coal mine.
- Tensions against foreign, and especially Chinese, ownership of mines rose after two Chinese mine managers allegedly shot a group of protesting miners at Collum coal mine last year.
Implications:
- It is likely that the new government will try to increase taxes to make the state benefit more from high copper prices. Additionally regulation of working conditions might be strengthened, as much of the unrest in the country’s sector was driven by dissatisfaction about labor rights.
©2011 | Wilfred Visser | thebusinessofmining.com
Categories: Market change
Tags: business, China, copper, election, government, labor rights, Michael Sata, mining, mining business, president, Sata, tax, Zambia
“The London Metal Exchange, where copper, aluminium, zinc, nickel, lead and tin change hands, is providing minute-by-minute insight to the subsequent share price moves of large mining companies. With LME metals in free fall, the shares of companies such as BHP Billiton, the world’s largest miner by market capitalisation, have followed.
With copper down 8.6 per cent and nickel a hefty 17.5 per cent on Thursday, extending big losses earlier on the week, it is understandable why miners’ shares are tumbling. More could come if LME prices continue to drop, as they are in early Friday trading. But that exclusive focus on LME metals ignores the real cash-cows of the mining sector: iron ore, thermal coal and coking coal. Prices are holding rather well this week.”
Source: Financial Times, September 23 2011
Observations:
- For London-listed miners the LME-metals account for 33% of earnings, with 53% from iron ore and coal (thermal and metallurgical).
- Nearly all commodities lost 5% or more of their value in the spot market on Thursday and Friday.
Implications:
- Falling commodity prices signal doubt about continued economic growth is starting to affect traders, despite miner’s comments that demand is staying strong. The falling premium of lump ore over fines confirms the view that we might be past the peak of prices.
- Miners will need to decide again about hedging (part of) their production to benefit longer from high prices. Long term supply contracts for bulk materials do serve as a sort of hedge, but metals-prices could also be hedged using derivatives.
©2011 | Wilfred Visser | thebusinessofmining.com
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Categories: Market change
Tags: business, coal, copper, hedging, iron ore, LME, London Metal Exchange, mining, mining business, nickel, share price, spot
“Freeport-McMoRan Copper & Gold Inc.’s Indonesia unit suspended mining operations at its Grasberg mine in West Papua on Thursday, as workers started a strike that could last a month, a labor union spokesman said. ‘All of the mining operations, except for the public facilities, are shut down,’ Juli Parrorongan told Dow Jones Newswires in a text message. All workers at the mine are participating in the strike, which will last until Oct. 15 if the company refuses their demand for higher pay, Mr. Parrorongan said.
Freeport suspended operations during a weeklong strike at Grasberg in July and lost about 35 million pounds of copper and 60,000 ounces of gold output. ‘We are disappointed that union workers decided to implement an illegal work stoppage,’ PT Freeport Indonesia, which is 90.64% owned by Freeport-McMoRan, said in a statement. The company said that since July 20, it ‘has negotiated in a diligent good-faith manner’ with the union toward a collective labor agreement to cover 2011-13.”
Source: Wall Street Journal, September 15 2011
Observations:
- Grasberg forecasted 2011 total mine sales of 1 billion pounds of copper and 1.3 million troy ounces of gold, representing approximately 3.1% of global copper production and 1.5% of global gold production.
- Current negotiations started after an 8-day strike in July. Freeport offers a 22% wage increase over 2 years, but unions demand an increase of salaries by more than 100%.
Implications:
- Copper price has been relatively stable for the year to date, but the news of the strike at Grasberg coincides with reports of falling production in Chile and increased buying by Chinese traders, potentially leading to a new price rally.
- Several analysts still expect a modest global copper supply increase for the year. However, if strikes spread to other mines supply for the year might actually decrease for the first time in about a decade. Global production has almost doubled in the past 20 years, only experiencing a short stabilization in 2002-2003.
©2011 | Wilfred Visser | thebusinessofmining.com
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Categories: Market change
Tags: business, copper, FCX, Freeport, Freeport-McMoran, gold, Grasberg, mining, mining business, Papua New Guinea, PNG, production, strike, supply, union
“Chinese companies and investors are stepping up their purchases of industrial commodities such as copper, in a show of confidence in the global economy that stands in contrast to the turmoil in western markets. The wave of buying is providing support for metals and minerals prices after commodities prices fell this month at worries about a double-dip. Senior executives at trading houses, mining companies and banks said Chinese consumers had used the recent drop in prices to rebuild stocks.
‘China is significantly less pessimistic relative to people in the western world,’ said Raymond Key, head of metals trading at Deutsche Bank. ‘On dips they are restocking, especially in copper.’ An executive at an important Chinese trading house added: ‘There is no doubt some traders have been buying [copper] recently.’”
Source: Financial Times, August 30 2011
Observations:
- The global copper trade is transparent because of the unknown size of stocks at various points in the process, as indicated below. Especially the size of ‘bonded warehouse stocks’, which are often controlled by governments, can only be estimated.
- Traders estimate the size of the government controlled bonded warehouse stocks to have halved over the past months, leading to a high demand for copper as stock have to be rebuilt.
Implications:
- The copper trading chain shows the effect of the bull whip syndrome: small changes at the end of the chain result in large impact at the start because each player tries to anticipate the next moves. Copper price decreased as consumers were reducing stocks, trying to avoid buying on the top of the market. At the same time players all along the chain try to reduce stocks and inventory to minimize working capital. As soon as shortage of stocks forces consumers to start buying, prices shoot up because of a lack of reserves along the chain.
- The Chinese State Reserve Bureau (SRB) holds large stocks in bonded warehouses, but it is unknown how large these stocks really are. The SRB can use these stocks to influence global prices and at the same time the metal stocks are used as a means to reduce holdings of foreign currencies by buying physical stocks. Overall the controlled stocks should be expected to reduce spikes in demand and supply, as a relatively stable copper price is important for China’s manufacturing industry.
©2011 | Wilfred Visser | thebusinessofmining.com
Categories: Market change
Tags: bonded warehouses, bull whip, business, China, copper, Cu, mining, mining business, price, SRB, State Reserve Bureau, stocks, trade, warehouses
“Chilean miner Antofagasta PLC on Tuesday doubled its interim dividend after reporting a 54% rise in first-half net profit due to higher average commodity prices and volumes. Chief Executive Marcelo Awad said the miner remains well positioned to deal with commodity-price volatility and relatively strong cost pressures given its low average net-cost position. …
Antofagasta expects global copper output to fall 500,000 tons short of demand this year and forecasts prices to average more than $4.20 a pound in the second half. This compares with $4 a pound in mid-August and a record average $4.26 a pound for a calendar half-year in the first half. Antofagasta reported an 84% rise in first-half earnings before interest, taxes, depreciation and amortization, or Ebitda, to $1.95 billion. Net profit rose 54% from a year earlier to $696.2 million, while the declared interim dividend rose to $0.08 a share from $0.04 a share in the same period a year ago.”
Source: Wall Street Journal, August 23 2011
Observations:
- Antofagasta mainly operates in Chile. The key growth project is the ‘Esperanza’ project close to the operating ‘El Tesoro’ mine. Exploration in Peru, USA, Australia and Pakistan signals the ambition to expand internationally.
- The company is controlled by the Luksic family, which holds approx. 65% of the shares.
Implications:
- Antofagasta appears not to be affected by the strikes that stopped production in other mines in the region, signalling a good relationship of the management with the unions.
- The payout ratio of 11% of profits is above expectations, but below the 35% benchmark the company adheres to. The management is either hoarding cash for a significant investment or is planning to announce a special dividend at the end of the year. Last year a special dividend of 100% was turned out at year end.
©2011 | Wilfred Visser | thebusinessofmining.com
Categories: Financial reports
Tags: Antofagasta, business, Chile, copper, dividend, El Tesoro, Esperanza, financial report, gold, Luksic, mining, mining business, strike
“Escondida, the world’s largest copper mine, declined the Chilean government’s offer of mediation in its labor conflict, Valor Futuro reported Tuesday, citing a company document. The sole union at the mine, representing 2,375 workers, went on strike late Thursday to protest what it says are unmet labor-contract terms.
‘We’ve received an invitation from the government to talk, and in this context we’ve given them our reasons for declining to participate at a negotiations table with union leaders while the illegal strike continues,’ reads the Escondida document as reported by Valor Futuro.”
Source: Wall Street Journal, July 26 2011
Observations:
- Escondida (translated: ‘hidden’) is majority owned and operated by BHP Billiton. Unions demand higher bonuses, unmet housing benefits, the elimination of shifts lasting more than 12 hours, and protection for sick workers.
- Daily lost output could add up to 3,000 tons. The company plays tough by refusing to continue negotiations as long as the strikes continue.
Implications:
- The wave of new labor contracts reached for various copper mines in Chile through collective bargaining has gone relatively smooth so far. Leaders of Codelco have expressed fear that the conflict at Escondida could spread to other companies.
- High commodity prices and increased resource nationalism have led to a surge in mine operation strikes in the last months: BHP’s Australian coal operations, South African coal mines, and Escondida being the most well-known. Companies try to maximize output and make record profits while prices are high, and in turn workers demand a larger part of this profit then originally agreed upon.
©2011 | Wilfred Visser | thebusinessofmining.com
Categories: Corporate Social Responsibility, Market change
Tags: BHP Billiton, bonus, business, Chile, Codelco, copper, Escondida, mining, mining business, Mitsubishi, profit, Rio Tinto, strike
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