Archive
Mining Week 23/’12: Investment dilemmas for BHP and Fortescue
Top Stories of the Week:
- Rumour around retention plan for Xstrata executives
- Several major shareholders have voiced discontent with the approx. $370mln retention bonuses for the top 72 executives of Xstrata that has been made part of the vote on the Glencore-Xstrata merger.
- Sources: Financial Times 1; Financial Times 2; Wall Street Journal
- Australian state governments fight for BHP investment
- BHP Billiton received environmental clearance for the expansion of Port Hedland’s iron ore harbour. The project could cost around $20bln up to 2022 to increase export capacity to 350Mtpa.
- The government of Southern Australia is pressuring BHP to start the expansion of its Olympic Dam copper/uranium project before the end of the year, threatening not to extend the permits. The Olympic Dam expansion is one of the key projects that might be cancelled or delayed as BHP tries to limit investment and return money to shareholders.
- Sources: Bloomberg; Business Spectator; Financial Times
- Fortesque worries about debt servicing
- Fortescue, Australia’s third largest iron ore miner, is close to completion of an expansion that will enable it to export 155Mtpa iron ore.
- The CEO of the company has indicated that it will focus on repayment of debt before undertaking further expansion. The company has received negative feedback from investors because of its high gearing. Its Debt/Equity ratio stands at approx. 45%, versus 26% for Vale and Rio Tinto and 15% for BHP Billiton.
- Sources: Fortescue media release on expansion progress; Wall Street Journal; 9News
Trends & Implications:
- If BHP decided to press on with the Port Hedland expansion at the expense of large development projects in other business units that would be a next sign that the supermajors are preferring the relatively predictable iron ore market over further diversification. Both Rio Tinto and BHP Billiton are considering sale of their iron ore business, BHP is in the process of reviewing the options for its Australian manganese operations, and Vale reached a deal last week to dispose its coal operations.
- The proposed retention bonuses for the top 72 managers of Xstrata add up to around $370mln, an average of some $5mln per person, 4% of last year’s profit, roughly 1-2 annual executive salaries per person, about $0.8 per share, or some 0.1% of share price. The bonuses are set up to keep the managers with the company for at least another 3 years. Even though we are talking about a lot of money that could trigger ethical debate about the executive pay in the industry, the shareholders hardly have any ground to protest the plan from a business perspective. Retention of the top managers after the merger should certainly enable the company to get a quick payback on the $370mln.
©2012 | Wilfred Visser | thebusinessofmining.com
Mining Week 48/’11: Change in Brazil & Tax in Australia
Top Stories of the Week:
- Australia’s Mineral Resource Rent Tax approved by lower house
- The new 30% tax on profits above A$75mln for coal and iron ore projects has been approved by the lower house and is now only to be approved by the senate. The tax has been debated for approx. 2 years. Initially proposed by Kevin Rudd, the former premier, the regime has been tuned down and now includes arrangements to stimulate and protect investments.
- Sources: Wall Street Journal; Financial Times; Australian Treasury MRRT explanation
- Vale appoints new CFO: Tito Martins
- Tito Martins, Vale’s head of base metals, has been appointed as the new CFO of the company. Several executive management positions changed in the first major move of the new CEO to strengthen control. Mr. Martins was involved in the acquisition of Inco, which turned into Vale’s base metals division which was led by Mr. Ferreira.
- The change of top management of Vale was started by appointing Murilo Ferreira CEO in the place of Roger Agnelli after the presidential elections in Brazil. One of the reasons of conflict between government and Vale was the building of a fleet of iron ore carriers in Asia rather than domestically. This fleet was in the news this week as Chinese ports are refusing to host them, trying to protect the interest of incumbent shipping lines.
- Sources: Vale’s press release; Financial Times
- Rio Tinto bids for uranium explorer
- Rio Tinto convinced the board of Hathor Exploration, a Canadian uranium explorer, with a C$654mln bid. The bid is approx. 5% higher than rival Cameco’s bid. Hathor owns rights to various uranium deposits in the Athabasca basin.
- Sources: Financial Times; Rio Tinto press release; Hathor Exploration board recommendation
Trends & Implications:
- The changes at Vale should prepare the company for further changes to the business environment for the major iron ore producers. The introduction of the MRRT mainly hits Rio Tinto and BHP Billiton, but all three majors are figuring out how to react to increasing uncertainty about demand. Asian steel producers are pushing for adaptations to the recently changed pricing mechanisms, moving the pricing system to shorter term contracts. At the same time various Asian players are starting to buy iron ore assets in the price range of hundreds of millions to several billions of dollars; threatening the dominance of incumbents.
- Rio Tinto is trying to buy into uranium at a moment where industry shares are depressed because of the nuclear disaster in Japan last year. The bid for Hathor signals Rio’s management still believes in the potential of the industry. The company says it accounts for 16% of the world’s uranium production from mines in Australia and Namibia.
©2011 | Wilfred Visser | thebusinessofmining.com
Mining Week 43/’11: Uncertainty in Indonesia
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
- Rio Tinto plans to spin off 13 of its smaller aluminium assets for an estimated $8bln. The company wants to focus its attention on top tier assets.
- Sources: Rio Tinto press release; Wall Street Journal; Financial Times
- Rio Tinto buys Hathor Exploration, a uranium exploration business active in Canada, for over $500mln. Key asset of Hathor is Saskatchewan’s Roughrider deposit.
- Sources: Rio Tinto press release; Wall Street Journal; Bloomberg BusinessWeek
- 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
China Guangdong withdraws offer for Kalahari Uranium Deposit
“China Guangdong Nuclear Power Holding Co. withdrew its two-month-old, £756 million (US$1.24 billion) bid to acquire a big stake in an African uranium deposit, after the Japanese nuclear crisis damped enthusiasm for nuclear power. CGNPC, one of China’s two largest nuclear-power generators, late Tuesday withdrew its offer for U.K.-based Kalahari Minerals PLC after Britain’s Takeover Panel said the Chinese company couldn’t reduce its offer. Kalahari’s main asset is its nearly 43% stake in Australia-based Extract Resources Ltd., which is developing the US$1.48 billion Husab project in Namibia, one of the world’s largest untapped uranium deposits.” Source: Wall Street Journal, January 18 2011
Observations:
- CGNPC owns 5 nuclear power plants in China and is trying to secure access to uranium. It did a $1.2bln bid for Kalahari Minerals on March 8, 3 days before the earthquake in Japan. Global uranium market has been hit severely by the nuclear problems caused by the earthquake, reducing the value of Kalahari Minerals.
- Kalahari minerals owns 43% of Extract Resources, which owns the Husab uranium deposit in Namibia (Rossing South). Rio Tinto is the third important player as shareholder of both Kalahari and Extract and owner of the Rossing uranium project close to the Husab deposit.
Implications:
- Although the offer was withdrawn it is likely that CGNPC will still try to buy the deposit at a lower price. An new offer or a deal via an allied company at a lower price would force the British Takeover Panel to look at the case again. As Kalahari’s board agreed with the earlier price offered, it is likely they will be open to a new offer.
- Rio Tinto has 3 options: divest its interest in Kalahari and Extract in a move to get away from uranium mining; try to gain control over Extract and merge the Rossing and Husab projects, potentially signing CGNPC as key customer; or leave the situation as it is, potentially partnering with CGNPC in the future.
©2011 | Wilfred Visser | thebusinessofmining.com
Mining impact of Japan’s earthquake
“Billions of dollars of uranium-mining investments in Australia could be at risk if explosions and radiation leaks at reactors in quake-hit Japan prompt governments to rethink plans to produce more nuclear power. With more than 30% of the world’s economically exploitable uranium reserves, Australia has a lucrative resource base as fears of climate change tilt governments away from fossil fuels and toward greater interest in nuclear power. But Friday’s massive earthquake in Japan is presenting miners like BHP Billiton with a major dilemma: press ahead with new uranium developments, or put them on ice until governments give a public vote of confidence in nuclear power.” Source: Wall Street Journal, March 14 2011 “Exports of finished steel to Japan will rise in the coming months as the Asian nation rebuilds after the 9.0 magnitude earthquake, two senior Indian steel company executives said Tuesday. Economists estimate damages from the earthquake could run as high as 10 trillion yen and knock three percentage points off Japan’s gross domestic product growth this year. ‘It would be important to note that a lot of the wooden houses and structures traditionally found on Japan’s coastline may now be replaced with buildings made of steel and cement, as they would be better able to withstand the impact of a tsunami,’ Malay Mukherjee, chief executive of Essar Steel Ltd., said on the sidelines of an industry event. He said the quake could lead to a reduction in steel exports from Japan.”
Observations:
- Several nuclear power stations in Japan were severely damaged by the earthquake in Japan. The risk of damage in case of an earthquake, with potential risk of a meltdown in several reactors was known by the government as early as 2008.
- In the very short term both demand and supply of steel in Japan drop, as power outages are expected and focus is on disaster relief and nuclear safety. Once rebuilding commences the Japanese demand for steel will certainly show a one-off increase.
Implications:
- The disaster in Japan will not only refuel the discussion on the use of nuclear energy in general and nuclear power plants in earthquake zones in particular, but will also trigger the discussion of the corporate responsibility of miners in supplying the fuel for the power plants. Miners will most likely not change their standpoint that the uranium can and should be used responsibly, but public action against any player in the nuclear power value chain should not be ruled out.
- The spike in Japanese steel demand will cause the global markets of steel, coal and iron ore to shift. Japanese steel makers will most likely be able to step up production to fulfill domestic demand. As a result the country will import more coal and ore, but will export less steel. All of this will result in upward pressure for the seaborne prices.
©2011 | Wilfred Visser | thebusinessofmining.com
AEMFC: South Africa’s state owned miner
“South African President Jacob Zuma launched the new ‘competitive’ State mining company, which will produce 800 000 t/y of energy coal at its first mine and synthetic crude oil from another in 2013. President Zuma turned the first sod at the new R130-million ($18.7mln) 120-employee Vlakfontein coal mine, which is situated 100 km east of Johannesburg and 10 km northwest of the town of Ogies, the first venture of the State-owned African Exploration Mining & Finance Corporation (AEMFC), which envisages being a top-five coal producer by 2020.” AEMFC CEO Sizwe Madondo tells Mining Weekly Online that discussions with State electricity utility Eskom indicate that the Vlakfontein coal, which will be produced at an initial rate of 800 000 t/y, will be competitively priced. Eskom, which will be the buyer of the Vlakfontein coal, currently burns 115-million tons of coal a year, and expects to be burning 250-million tons a year by 2018.” Source: Mining Weekly, February 26 2011
Observations:
- Original launch of the state-owned company at Vlakfontein mine was planned for October 2010, but was postponed for several months. Apart from operating the coal mine the government aims to combine its minority participation in mining companies around the country in AEMFC.
- The company appears to be mainly focused on Energy minerals (coal, synthetic oil from coal, and uranium). The ambition to be a top-five coal producer by 2020 therefore most likely is based on energy coal production.
- According to BP’s energy statistical review South Africa accounts for 3.7% of world coal reserves and 4.1% of global production, which makes it the world’s 6th-largest coal producer (behind China, USA, Australia, India, and Indonesia)
Implications:
- Fears of the ANC government nationalizing mines to benefit from the high profits in the industry have been tempered by the mining minister recently when he rejected a proposal by ANC’s youth organization to start nationalization. However, the existence of a state owned mining company makes the step to nationalize assets easier in case a future governments has a different opinion.
- The investment climate for developing reserves and obtaining licenses for foreign companies will only become more challenging now that a local state-owned player is competing for the same opportunities. It will be hard for the South African government to prevent corruption and avoid an image of an unlevel playing field.
©2011 | Wilfred Visser | thebusinessofmining.com
Russia’s ARMZ Buys Mantra for $1.15 Billion
“Russia’s ARMZ Uranium Holding Co. agreed to acquire Australia’s Mantra Resources Ltd. for about 1.16 billion Australian dollars (US$1.15 billion) in its ongoing bid to acquire low-cost sources of uranium for its parent company, State Atomic Energy Corp., Russia’s largest utility. At the same time, ARMZ entered an option agreement to flip Mantra to Vancouver-based Uranium One Inc., for the same price it paid. ARMZ agreed to acquire a 51% stake in Uranium One earlier this year, establishing Uranium One as ARMZ’s platform to acquire additional uranium sources for State Atomic Energy. “
Observations:
- Canadian miner Uranium One is controlled by ARMZ, which in turn is controlled by State Atomic Energy (or Rosatom), the Russian utility that controls 17% of the world’s nuclear fuel production.
- Uranium One operates 3 mines in Kazakhstan, with an additional development project in the country, and various exploration projects and an In Situ Leach mine in the United States.
Implications:
- Rosatom is attempting to secure access to uranium ore as global demand is expected to increase strongly over the next decade. The company is smartly using Uranium One, with its proven mining and processing experience, as a vehicle to produce.
- Depending on the success of international climate change conventions and the approach to small-scale nuclear energy in these conventions the exploration of uranium deposits might experience a surge. However, as uranium deposits typically have a very different geological composition than gold deposits it will not be easy for the many small gold exploration companies to switch to uranium.
©2010 | Wilfred Visser | thebusinessofmining.com
Uranium Miner Expects Profit Hit
“Energy Resources of Australia Ltd., the uranium arm of mining giant Rio Tinto, on Wednesday downgraded its annual production guidance for the second time this year, and said a strong Australian dollar is hurting its bottom line. The production shortfall means ERA will have to cover some supply requirements with purchases, further eroding its earnings. ERA owns Ranger, a major mine that provided 9% of the world’s uranium oxide last year. The company, 68%-owned by Rio Tinto, said the fall in output was caused by disappointing ore grades. Without expansions, Ranger’s ore body is due to run out by 2012. “
Observations:
- Energy Resources of Australia also owns the undeveloped Jabiluka Deposit, close to the Ranger mine. However, development of this deposit is subject to the cooperation of indigenous people.
- Rio Tinto is planning to increase its presence in uranium production through the Kintyre development (operated by Cameco) and Rössing Uranium mine in Namibia. BHP Billiton is the only competitor active in uranium production through the Olympic Dam mine.
Implications:
- According to the World Nuclear Association, Australia accounted for 16% of global uranium production in 2009. Ceasing of operations at Ranger would more than half this share.
- The global demand for uranium is likely to increase rapidly as safer small-scale nuclear power generation facilities become mainstream. Given the location of current reserves, Australia will be one of the major producers that will be able to facilitate increases of supplies. The Olympic dam reserves in Southern Australia are the world’s largest reserves.
©2010 | Wilfred Visser | thebusinessofmining.com
Itochu Buys Stake in Australian Miner
“Itochu Corp. said Friday it has struck a deal with London-listed Polo Resources Ltd. to buy a roughly 10% stake in the owner of one of the world’s largest undeveloped uranium deposits. Itochu’s acquisition of Polo’s stake in Extract Resources Ltd. gives it a major advantage over North Asian rivals in the race to secure offtake from the Rossing South mine in Namibia once it begins production. Australia’s Extract has been in talks for several months with potential partners in the development of Rossing South, which it says has the potential to produce 15 million pounds of uranium oxide a year. That would make it the world’s second-largest uranium mine. Itochu is buying Polo’s entire 9.2% stake, plus a 1.1% interest from a related party of Polo, in a transaction valued at about 15 billion yen (US$169 million) in total.” Source: Wall Street Journal, July 9, 2010
Observations:
- Itochu, a Japanese industrial conglomerate, basically buys 10.3% of Rossing South mine in Namibia, the worlds largest undeveloped (known) uranium deposit.
- The company tries to secure a long term supply of uranium for the Japanese nuclear power industry. Japan is one of the countries with the highest capacity of nuclear power generation in the world.
Implications:
- Uranium deposits and uranium exploration companies are becoming increasingly attractive acquisition candidates as the US government and large energy companies seem to agree that the next generation of nuclear energy (fast breeder reactors that do not produce nuclear waste and that do not have the potential of explosive reactions) is the most likely cure for the world’s fossil energy addiction in the long term.
- The main producers of uranium are Canada, Australia, Russia, Namibia and Kazakhstan. This spread of deposits makes the production of uranium host to much less geopolitical issues than oil production.
©2010 – thebusinessofmining.com
