Archive
Mining Week 39/’12: Fortescue moves on; GlenStrata almost there
Top Stories of the Week:
- Xstrata’s board votes October 1st on Glencore offer
- The decision by Xstrata’s board on whether or not to endorse Glencore’s new bid for the company is delayed by a week to October 1st. The endorsement might help to convince a majority of shareholders to accept the offer for 3.05 shares of Glencore per share of Xstrata.
- The debate around generous retention packages for Xstrata’s key managers started again as several large shareholders voiced their discontent. Glencore stressed nothing will change to those packages unless Xstrata’s board wants to adjust them. Finding a compromise to satisfy the key shareholders might be the final step for the board to make the deal happen.
- Sources: Wall Street Journal; Financial Times 1; Financial Times 2
- Fortescue solves debt problems by refinancing $4.5b debt
- Fortescue announced refinancing of $4.5bn debt with Credit Suisse and JP Morgan as underwriters. Debt maturity of the new deal is 5 years. The company was facing liquidity problems as low iron ore prices and aggressive investment schedules were undermining its ability to repay debt.
- Sources: Wall Street Journal; Fortescue announcement
Fortescue’s debt profile prior to refinancing
- Oyu Tolgoi waiting for power
- Rio Tinto’s Oyu Tolgoi mine is 97% complete, but negotiations with Mongolian and Chinese governments on power supply delay startup. Oyu Tolgoi built 220Kvolt power line to connect to the Chinese grid, but can’t sign a offtake agreement without consent of the Mongolian government
- Sources: Financial Times; The Australian; Project website
Trends & Implications:
- Oyu Tolgoi’s trouble to get powered is just one example of the challenges many large operations face to secure affordable power supply. The power requirements of a large operation require a significant change and development of power grids of many developing nations. Generation capacity is typically not readily available and the large offtake trigger discussions about long term price agreements.
- After meeting with Glencore’s board this week, Xstrata’s board appears to be working hard to make the merger/acquisition go ahead. It is hard to imagine another outcome in which Xstrata’s shareholders get more value for their company, making it likely they will accept the offer. If the deal is approved by Xstrata’s shareholders, the changes in holdings various large investors will likely make will give an interesting insight into the clientele effect the integration of a mining house and a commodity trader could have.
2012 | Wilfred Visser | thebusinessofmining.com
Mining Week 37/’12: Glencore increases bid to take over Xstrata
Top Story of the Week: Glencore takes Xstrata bid hostile
- Hours before Xstrata’s shareholders were to vote on the proposed merger of equals, Glencore announced it would make a higher bid on different terms . If the vote would have gone on the Qatari sovereign wealth fund would most likely have blocked a deal.
- The new bid offers 3.05 shares of Glencore for each share of Xstrata, 9% up from the previous bid at 2.80x. In response to the bid Xstrata’s share price went up 8.6% on Friday, with Glencore’s share price dropping 2.9%.
- Key changes to the previous bid are:
- The ‘merger of equals’ will likely change to a plain takeover. As a Xstrata’s shareholders can simply tender their shares and Glencore gains control as soon as it gains a majority of shares (up from the current 35%). Under the former proposed deal approx. two-thirds of Xstrata’s shareholders excluding Glencore would have to vote in favor of a deal.
- The initially proposed governance structure with Xstrata’s CEO Mick Davis as the new CEO of the combined company is scrapped and Glencore’s CEO Ivan Glasenberg will take the helm of the new company.
- The exact details of the new structure are not yet known, as Glencore is yet to submit the new bid. The implications for the position and potential retention packages for Xstrata’s current top managers and the name of the new company will become clear when the new bid is published.
- Sources: Financial Times 1 2 3; Wall Street Journal 1 2 3; Reuters; BusinessWeek
Official reaction by Xstrata’s independent directors
Trends & Implications:
- Facing the likely rejection of the merger bid Glencore had little to lose in changing the terms for the offer. The likelihood of a takeover offer being accepted is much higher than the stakes the merger was going to happen on the proposed terms. Xstrata’s shareholders know that their changes of getting an even better deal than what is offered now are very slim and that they face an immediate drop in Xstrata’s share price if Glencore doesn’t gain control.
- The offer values Xstrata roughly $4bn higher, but as the company holds 35% of Xstrata already it would cost Glencore approx. $2-3bn extra. If the deal was canceled Xstrata’s share price was likely to lose the roughly 10% in value resulting from Glencore’s bid, amounting to a loss of $1-2bn for Glencore.
- The sudden governance change to try to make Ivan Glasenberg CEO of the new company is hard to understand. The merger setup was criticized earlier because of the strong focus on keeping Xstrata’s executives on board with generous retention bonuses. Either Glencore’s leadership never really believed they will not be able to achieve the same results as Xstrata’s leadership or they will keep most of the retention controls in place in the new offer.
2012 | Wilfred Visser | thebusinessofmining.com
Mining Week 28/’12: GlenStrata in doubt
Top Story of the Week:
- Xstrata vote on merger with Glencore delayed
- The vote by Xstrata shareholders on the proposed merger between Xstrata and Glencore, originally scheduled for July 12th, has been delayed to a yet to be announced date.
- Several large shareholders, including Qatar Holding, which holds approx. 11% of the shares, have threatened to try to vote against the deal if the exchange ratio of 2.8 shares of Glencore per Xstrata share is not sweetened. Xstrata’s shareholders have a very strong voice in the deal because Glencore can’t use its 35% of the voting rights. As a result a small group of only some 15% of the shareholders could block the deal.
- Under pressure of shareholders the proposal of cash retention bonuses for Xstrata executives was adjusted to stock only payments. The planned retention measures were made part of the vote on the merger and threatened to become an obstacle to the approval of the deal
- The Australian antitrust authorities approved the proposed deal last week, judging that the combination would not be big enough to distort market efficiency. European Union, Chinese, and South African regulators still have to give their judgement.
- Sources: Xstrata press releases; Financial Times; Wall Street Journal
GlenStrata timeline
©2012 | Wilfred Visser | thebusinessofmining.com
Mining Week 25/’12: Whitehaven buyout options; Mine 2012
Top Stories of the Week:
- Whitehaven rejects initial offer from largest shareholder
- Tinkler, largest shareholder of Whitehaven with over 20% of shares, is trying to arrange financing to buy the full group. An initial approach was rejected by Whitehaven as financing of the bid was not deemed solid.
- Whitehaven became Australia’s largest listed coal group last year after taking over Ashton. Share price dropped approx. 30% over the past 2 months, making the company an attractive buyout target
- Sources: Wall Street Journal; Financial Times; Reuters
- PWC launches ‘Mine 2012′
- Consultancy PWC recently published its annual study on the key industry trends in the mining industry, focusing on the 40 largest mining companies. This year’s report is titled ‘the growing disconnect’, zooming in on the paradox between the need to build new projects to increase supply and the reluctance by shareholders to have their companies commit funds to investment.
Record historical results, high commodity prices, and a bullish outlook shared by many miners continues to underline the industry’s strong fundamentals. But investors’ reluctance to emerge and support growth plans points to a growing disconnect between the market and the mining industry.
Source: PWC
Trends & Implications:
- PWC identifies the following key trends in their report:
- Increased volatility is here to stay
- Long-term demand fundamentals remain robust …
- … but supply will be the industry’s real challenge going forward
- Structural changes to the cost base
- Changing fiscal regimes and resource nationalism
- Capital expenditure requirements
- Can’t bring it on fast enough
- The report presents the numbers around investment and use of cash for the Top 40 mining companies: $98 billion was invested in capital projects in 2011 and plan for a further $140 billion for 2012. At the same time share prices have decreased across the line. PWC argues 2011 marks the start of the growing disconnect.
©2012 | Wilfred Visser | thebusinessofmining.com
Mining Week 19/’12: Week of the Investors
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
Mining Week 10/’12: Xstrata buys coal, Molycorp goes downstream
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:
- 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
Vale drops $1.1bn bid to purchase Metorex
“Brazil’s Vale has dropped its $1.1bn offer for Metorex, a central African copper and cobalt miner, clearing the way for China’s Jinchuan Group to complete a $1.4bn takeover that would establish the state-owned miner in risky frontier markets for metals. The move came a week after Jinchuan, one of China’s largest mining companies, disrupted its Brazilian rival’s plans by offering R8.90 per share for Metorex. Metorex, however, has not yet recommended Jinchuan’s higher offer to shareholders. Its board will “convene shortly to consider its position with respect to the Vale offer and the Jinchuan offer”, the South Africa-based miner said. ‘Africa is a key focus for our company,’ a Jinchuan executive told the Financial Times. He said it aimed to expand production of copper and cobalt, two industrial metals with rising demand being driven by Chinese consumption.” Source: Financial Times, July 11 2011
Observations:
- Metorex is a South African copper and cobalt miner with operations in Zambia and Congo. The company’s board has recommended the shareholders to accept Jinchuan’s offer, paving the way for the takeover of the company. Vale withdrew its inferior bid quoting capital allocation rigor as the reason for not doing a higher bid.
- Jinchuan is a government owned non-ferrous metals miner. The company has been rumoured to plan an IPO for many years. End of 2010 the company announced a small acquisition in South African platinum mining and furthermore the company bought a Canadian developer of a mine in Tibet.
Implications:
- The acquisition by Jinchuan is an example of Chinese company’s high willingness to pay for foreign assets. The project is certainly not worth more to Jinchuan than to Vale, which owns assets nearby which could cause synergies. However, Chinese companies are willing to pay a high premium to grow internationally, positioning themselves as state champion in a consolidating industry.
©2011 | Wilfred Visser | thebusinessofmining.com
Riversdale Directors Back Rio Tinto Offer
“Rio Tinto PLC’s 3.9 billion Australia dollar ($3.8 billion) takeover of Riversdale Mining Ltd. received a boost Monday when the last holdout on the coking coal miner’s board recommended the deal along with its other directors. NK Misra, a Tata Steel Ltd. appointee to Riversdale’s board thanks to the Indian company’s 24.2% stake in the miner, backed Rio’s offer signalling that the steel producer may not seek to block Rio’s buyout with its own bid to take control of the miner, according to a statement.”
Observations:
- Rio Tinto’s bid was unconditionally approved by the Australian Treasurer last Friday, enabling it to quickly close the deal. To convince the shareholders the opinion of Riversdale’s board was crucial.
- ICVL is reported to meet with a consortium of Indian coal producers on Thursday to discuss a counterbid. This gives the Indians 3 weeks before the closure of Rio Tinto’s bid to convince the shareholders they can offer a higher price.
Implications:
- ICVL’s chairman has started the verbal bidding war already, by announcing in an interview that the consortium will offer a higher price than offered by Rio Tinto. However, it is hard to find more synergies with the Indian companies than with Rio Tinto. A high Indian offer for Riversdale would purely be a strategic move in order to gain production market share, which could lead to further opportunities in the future.
- The role of Tata in the acquisition is not fully clear. The company holds 24% of Riversdale’s shares and says it is not opposed to the acquisition. However, the advice by the board member appointed by Tata is explicitly said not to be Tata’s opinion. Tata could surprise Rio Tinto by siding with the Indian consortium, thus gaining goodwill from the Indian government.
©2011 | Wilfred Visser | thebusinessofmining.com
Capital Structure after the Crisis
The global recession has forced many companies to reevaluate their capital structure. Both the cost of debt and the likelihood of bankruptcy at high debt levels increased, offsetting the benefit or reduced tax expenses at high debt levels. It is therefore no surprise that the largest diversified miners have decreased their gearing. They have benefited from increasing commodity and share prices to reduce debt stake of firm market value to around 33% ((D/E); or 25% in D/(D+E)), in line with the industry’s historical average. A year ago Ernst & Young observed in a report on debt in the mining industry that the gearing had increased to 46%.
Liability comparison
The liability breakdown based on market value of equity for the 4 major diversified miners shows the strong position of BHP Billiton (Figure 1). The 86% equity in the financing mix, combined with over $12bln in cash, gives the company an enormous financial flexibility. Anglo American struggles to keep up with the other majors at a total of 66% equity (gearing of approx. 50%).
The Book Value liability comparison does not show significant differences. The relatively large portion of common stock in Vale’s balance sheet mainly indicates that the company issued large amounts of stock more recently than the other companies.
Figure 1 - Liability structure comparison
Asset comparison
Figure 2 - Asset comparison
While gearing of the companies varies quite a bit, the asset base is remarkably similar (Figure 2). The assets of the large miners typically show approx. 67% Plant, Property & Equipment (PP&E). The most obvious variation among the companies is the percentage of “other fixed assets”, which hold the goodwill created by paying a premium in acquisitions of other companies. Rio Tinto’s balance sheet still holds $14bln goodwill (33% of total assets), mainly because of the acquisition of Alcan in 2007. The relatively high percentage for Anglo American is not caused by goodwill but by a high proportion of long term investments in other companies.
Another important difference is the percentage of cash carried by the various firms. While the diversified miners typically need approx. 2-3% of asset value as operating cash, BHP Billiton holds 14% ($12bln), signaling a pile of excess cash held as a war chest for potential acquisitions. Rio Tinto’s cash at 4% of asset value is a healthy level, but indicates the company does not have much flexibility for acquisitions and/or capital projects in the short run.
Company specifics
The figures below show the evolution of asset base and capital structure of each of the four miners over the past 4 years.
BHP Billiton
BHP Billiton has maintained a stable asset base over the past years, using the large profits to slowly build a war chest for acquisitions. After the failure of the bid for Rio Tinto in 2008 and the potential failure of the bid for PotashCorp of Saskatchewan this year the company will have to reconsider announcing a superdividend or repurchasing shares to give cash back to shareholders.
Read more…
Peabody’s bid for Macarthur collapes
“Peabody Energy’s plan to acquire Macarthur Coal for A$3.8bn (U$3.3bn) has collapsed after the Australian miner yesterday said it could not recommend a revised takeover offer that was unlikely to win support from its two largest shareholders.
Macarthur said that based on the price and the conditions of the proposal it could not recommend the Peabody offer to shareholders, adding that the board felt that there was ‘no basis for further engagement with Peabody on the terms of its current proposal’. The US coal group last week cut its cash takeover offer for Macarthur , the world’s biggest supplier of pulverised coal, from A$4.1bn to A$3.8bn, or A$15 per share.
Source: Financial Times, May 19 2010
It did not specify why the price was lowered but referred to its examination of Macarthur’s financial records and Australian plans to introduce a new 40 per cent tax on profits generated by resource companies starting in 2012.”
Observations:
- The board of Macarthur, following the shareholders decided not to support the take-over. The board had set a 75% approval rate from shareholders, which was not met.
- Macarthur shares had risen significantly as stock holders would get a good premium for the shares. Now that the bid from Peabody has collapsed, share price is returning to more realistic values.
Implications:
- Citic, ArcelorMittal and Posco own just under 50% of the Macarthur shares. They are unlikely to approve any take-over that will threaten their position as buyers of the coal, which they need for their steelmaking activities. Obviously Peabody did not convince them on this point.
- Although Peabody does not tell the Australian tax increase has forced them into moving away, it will certainly have affected the ease with which they accept the decision.
Note: in July 2011 Peabody made a new offer in cooperation with ArcelorMittal
