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BHP Billiton and Rio Tinto growing in potash

October 6, 2011 Comments off

“Rio Tinto, the Anglo-Australian mining group, is re-entering the potash business through a joint venture with a Russian fertiliser producer which holds extensive exploration permits in the Canadian province of Saskatchewan.

Rio will initially acquire a 40 per cent stake in nine blocks covering an area of 241,000 hectares currently held by North Atlantic Potash, a subsidiary of Russia’s JSC Acron. Under the deal, Rio can eventually raise its stake as high as 80 per cent.”

Source: Financial Times, September 28 2011

“Mining heavyweight BHP Billiton is “aggressively” pursuing potash projects in Saskatchewan along with its Jansen asset, the company said on Wednesday.

“Although these are at an early stage, the data acquired suggests they have the ability to support significant potential developments,” spokesperson Ruban Yogarajah said, adding that the combined properties could “at least” match Jansen’s planned output of eight-million tons a year.

BHP Billiton in June said it approved a further $488-million to develop Jansen, bringing its total investment in the project to $1.2-billion.”

Source: Mining Weekly, September 29 2011

Observations:

  • Approx. 33mln tons of potash are mined annually, with Canada accounting for approx. 30% of global production. With price per ton of around $400-$500 the global market totals $13-17bln annually.
  • Both BHP Billiton and Rio Tinto are planning to move or expand in the Potash industry. BHP Billiton already is operating in Saskatchewan and tried to make a big move by taking over PotashCorp last year. Rio Tinto sold its potash exploration projects in 2009, but tries to re-enter in a JV with a small Russian player.

Implications:

  • The potash market it currently dominated by 2 marketing ‘cartels’: Canpotex (PotashCorp, Mosaic, Agrium) and BPC (Belarusian Potash Company: Silvinit & Uralkali), which control close to three quarters of global sales and typically copy each others pricing agreements with large customers. The rise of the large diversified players in the business (apart from BHP and Rio, Vale is also building its potash business) could break the power of these cartels and might move the market to pricing based more on spot prices.
  • From a technology and production standpoint it makes a lot of sense to have diversified mining companies, specialized in running large scale extraction projects, operate potash mines. Only on the marketing and sales side of the business synergies will be hard to realize, but companies like BHP and Rio Tinto have the experience and size required to set up a strong marketing presence.

©2011 | Wilfred Visser | thebusinessofmining.com

GVK Acquires Majority Stake in Hancock

September 19, 2011 Comments off

“The GVK group said Friday it has acquired a majority stake in the Hancock coal project in Queensland, Australia, for $1.26 billion to secure thermal coal supplies for its planned power plants in India. It has acquired a 79% stake in the two Alpha mines, 100% of the Kevin’s Corner mine, as well as full ownership of ongoing rail and port projects connecting the Hancock coal projects.

The Hancock group, led by billionaire Australian businesswoman Gina Rinehart, said in a separate statement that GVK will pay $500 million up-front and the rest in phases. It will pay $200 million one year after the deal closes, and $560 million on the financial close of the coal project, anticipated to be in 2012. The GVK group owns and operates power, airport and other infrastructure projects in India, most of them through its listed entity, GVK Power & Infrastructure Ltd.”

Source: Wall Street Journal, September 19 2011

Observations:

  • GVK secures long term access to at least 20mln tons of coal a year, approx. a quarter of the total planned production of Hancock coal.
  • GVK has coal power projects in India in Punjbab and Goindwal Sahib, and owns 2 small coal mining projects in the state of Jharkhand (Tokisud and Seregarha).

Implications:

  • Indian companies are increasingly looking abroad to secure coal access. Both thermal coal and metallurgical coal are in demand, as coal mining capacity does not keep up with high economic growth.
  • For Hancock the sale of the coal projects frees up cash to develop the current project further and to pursue other opportunities more aggressively. Next to Hancock coal the group is involved in the Hope Downs iron ore project and the Jacaranda Alliance Joint Venture.

©2011 | Wilfred Visser | thebusinessofmining.com

Indonesia’s Indika to Expand Coal-Mining Capacity

June 15, 2011 Comments off

“Coal miner PT Indika Energy will expand capacity at least 25% in the next three years to meet the growing demand for fuel in expanding Asian economies, the company’s chief executive said. Indika plans to boost the capacity of the mines it controls through PT Kideco Jaya Angung to 50 million metric tons in the next two to three years from 40 million tons, said Arsjad Rasjid, Indika’s CEO and president director. The company hopes to lift capacity at least in part through acquisition.

The Jakarta-based company, which had revenue of around $440 million last year, is seeking to keep up with rising demand for thermal coal to fuel the power plants of India, China and in Indonesia. Indika is Indonesia’s third-largest coal miner, behind PT Adaro Energy and PT Bumi Resources.”

Source: Wall Street Journal, June 14 2011

Observations:

  • Indonesia is located close to China and India, both of which depend on thermal coal imports. At the same time the economic development in Indonesia (with over 240 million inhabitants) is driving the domestic demand. As a result the coal mining sector in the country is recently getting strong international attention.
  • The Indonesian coal mining industry was strongly reshuffled last year after Vallar combined the assets of domestic champions Bakrie and Bumi. Part of the this deal, which results in a FTSE-listed Bumi plc., is executed this week by Vallar issuing convertible bonds to Bumi resources.
  • Coal India is also looking to invest in Indonesian coal mines, using part of the funds raised through last year’s IPO, which had the company enter the global mining top 10 in terms of market capitalization.

Implications:

  • Indonesian coal reserves are rather small compared to Chinese and Indian reserves. With the strong rise of domestic demand it is foreseen that Indonesian exports are not going to be much higher than current levels. However, as most of the reserves are located on the island Kalimantan and demand is mainly on Java and Sumatra export facilities will be built anyway, linking the Indonesian market to the global seaborne coal market.
  • Indonesian government is trying to find a balance in regulating production and exports, looking at the conflicting perspectives of energy requirements for own development and income from coal exports. High export tariffs and/or production caps could possibly hurt the international investors.

©2011 | Wilfred Visser | thebusinessofmining.com

Lonmin to invest $2bln to boost production

May 10, 2011 Comments off

“Lonmin, one of three South African companies that mine most of the world’s platinum, plans to invest $2bn to restore its production to historic levels of about 1m ounces a year by 2015. In the six months to March, the London-listed miner raised earnings from a low base. Pre-tax profit doubled to $159m despite bigger pay packages for workers, rising electricity costs and the stronger rand which has been eating away at many South African miners’ profits.

Lonmin’s output has declined steadily over recent years, with the miner selling 706,000 ounces of platinum in its year to September compared to over 900,000 ounces in 2004 and 2005.”

Source: Financial Times, May 10 2011

Observations:

  • Lonmin currently depends on the Marikana mine for its entire production. The production increase to 2015 should come from this mine. The Limpopo mine currently is under care and maintenance, while the most company’s most promising growth opportunity is the Akanani deposit with just over 10 Moz platinum reserves. Global platinum production is concentrated in South Africa’s Bushveld complex and Russia’s Norilsk region, while demand mainly comes from car manufacturers in Asia and North America.
  • Lonmin is suffering from quickly increasing employment costs (8% increase over the year) and electricity costs (24% increase). Furthermore the appreciation of the South African rand makes costs increase while revenues (in dollars) are not equally increasing.

Implications:

  • Foreign exchange cost pressures are hurting miners with operations in both developing countries and developed countries in which currencies are not linked to the dollar when the dollar is weakening. With an increasing portion of production shifting to developing countries with high inflation rates exchange rates are becoming more and more important for business evaluation.
  • Several large diversified miners are hesitant to take a stronger position in platinum because of safety issues. Most existing projects have poor safety track records, making acquisition of producing assets a CSR-risk, while development of new projects would require significant capital expenditure and result in long lead times.

©2011 | Wilfred Visser | thebusinessofmining.com

Anglo American eyes $70bln Growth Pipeline

April 27, 2011 Comments off

“Anglo American PLC currently has in the pipeline about $70 billion worth of projects that it plans to use to drive organic growth in the years ahead, senior company executives said Thursday. Cynthia Carroll, the mining company’s chief executive, said at the company’s annual general meeting here that the growth ahead is strong with ‘a new mining operation [starting] every six to nine months for the next several years.’

The company plans to increase volume output 35% by 2013 and increase 50% by 2015. It is looking to double output by 2020 based on a growth pipeline of about $70 billion of approved and unapproved projects, senior company executives said during the meeting. The company is currently developing $17 billion in projects and is looking to approve another $16 billion in the near term. A remaining $50 billion worth of projects are still waiting to be approved.”

Source: Wall Street Journal, April 21 2011

Observations:

  • Anglo American currently has 4 major growth projects nearing production: the los Bronces copper expansion project in Chile; the Barro Alto nickel project in Brazil; the Minas-Rio iron ore project in Brazil; and Kolomela iron ore project in South Africa. Furthermore the company is investing heavily in Jwaneng diamond mine in Botswana. These five projects account for $13.5bln of the approved CapEx.
  • Other approved projects are mainly in platinum, with 7 projects in Southern Africa summing up to over $3bln investment. Key unapproved projects are Quellaveco and Michiquillay copper projects in Peru; Sishen iron ore expansion in South Africa; and South African New Largo and Colombian Cerrejon thermal coal projects

Implications:

  • Anglo American currently leans heavily on its copper business (29% of profits in 2010) and iron ore business (38% of profits in 2010), mainly due to high prices. Expansion plans will mainly increase the exposure to platinum, nickel and coal, ensuring strong diversification of the company’s revenue sources.
  • Anglo American’s approved CapEx of $18bln compares to Rio Tinto’s $22bln and Xstrata’s $14bln (at time of publishing 2010 annual report). Only BHP Billiton plans to invest much more in organic growth in the coming years. However, boosted by high cash reserves growth by acquisitions would again be an option for Anglo American. With the frontier of development projects shifting to Africa, the company clearly has a favorable position to make good deals with its experience in operating projects in the continent.

©2011 | Wilfred Visser | thebusinessofmining.com

Gerdau denies Usiminas acquisition plans

March 24, 2011 Comments off

“Gerdau SA, Latin America’s biggest steelmaker by output, Wednesday strongly denied rumors that it will use funds from its new share sale to buy stakes in fellow Brazilian steelmaker Usinas Siderurgicas de Minas Gerais SA, or Usiminas. At the same time, Brazilian industrial group Votorantim denied it is seeking to sell its 13% stake in Usiminas’s controlling shareholders’ group.

Funds raised in Gerdau’s new share sale, the prospectus for which was published Wednesday, will be directed at Gerdau’s current investment program, Gerdau said. This foresees spending of 10.8 billion Brazilian reais ($6.51 billion) in 2011-15, 75% of it in Brazil, to meet growing domestic demand for steel and maintain the company’s export levels, Gerdau said earlier this month. The planned investment will expand steelmaking, rolling-mill and iron-ore mining capacity.”

Source: Fox Business, March 23 2011

Observations:

  • Gerdau owns rights to four iron ore deposits in Brazil’s state of Minas Gerais. Total reserves were revised up from 1.9bln to 2.8bln tons last month.
  • In comparison, Vale, Brazil’s and even the world’s largest iron ore miner, holds proven reserves of approx. 10bln tons at production over 300mln tons of ore per year.

Implications:

  • Some analysts expect Gerdau to search for options to expand by acquiring one of the smaller steelmakers in Brazil. Acquiring a flat steel maker would complement Gerdau’s strength of producing long steel.
  • Other analysts expect Gerdau to team up with an experienced mining house in order to step up production in its mining assets. Current low margins in steel making caused by high iron ore, coal and electricity prices lead many steelmakers to analyze options to move upstream.

©2011 | Wilfred Visser | thebusinessofmining.com

Guinea to review mining licenses

March 7, 2011 Comments off

“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

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