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Vallar eyes acquisitions to follow Asian deal

January 5, 2011 Comments off

“Vallar, the London-listed cash shell founded by financier Nat Rothschild, is looking at acquisitions of coal assets in North America and Australia worth up to $1bn (£646m) as it seeks to bolster its aspirations to join the FTSE 100. Vallar is set to be transformed this month under a complex deal that will see it become a vehicle for Indonesia’s powerful Bakrie and Roeslani families in order to list their interests in London.

Vallar is currently looking at a coal mine in Mongolia as well as coal assets in Australia and North America, although the latter two regions are seen as more probable targets. ‘[Vallar] is in the market for a $1bn business in a western economy so Australia and America is more likely [than Mongolia],’ said the person.”

Source: Financial Times, January 3 2011

Observations:

  • Shortly after setting up Vallar Rothschild and Campbell, a former Anglo American coal executive, managed to combine the forces of two major Indonesian coal mining companies into Bumi plc, in which Vallar holds a 32% share.
  • The North American coal market is experiencing a wave of consolidation, with small and medium sized miners either merging or being acquired by larger firms that hope to realize synergies in management, transportation, and taxes.

Implications:

  • Vallar arises as the key challenger of Xstrata as the world’s primary western coal miner. Its founders manage to manoeuver the international financial and political arena smartly, aligning the interests of Chinese financiers, producers with Vallar’s ambitions. However, success of the venture will depend on the ability of the team to improve the performance of the Indonesian assets enough to justify the price paid.

©2011 | Wilfred Visser | thebusinessofmining.com

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China enters South Africa platinum sector

December 20, 2010 Comments off

“China is to enter the South African platinum sector in a transaction worth $877m, its biggest mining investment in the country, as it continues to target Africa as a source of raw materials.

The deal, announced on Friday, will be China’s second-largest investment in the continent outside the energy sector. The state-owned miner Jinchuan Group and the China-Africa Development Fund will take a 45 per cent stake in the junior miner Wesizwe Platinum for $200m, as well as funding a $27m stake for black investors in line with South African black empowerment rules.

The Chinese entities have further committed to raise $650m in project finance to develop Wesizwe’s Frischgewaagd-Ledig mine. Jinchuan – China’s biggest platinum producer, which acquired Canada’s Continental Minerals for $434m in September – will take all platinum group metals produced at the mine.”

Source: Financial Times, December 18 2010

Observations:

  • The $5bln China-African Development Fund is stepping up its involvement in the mining industry, signing an agreement with China National Nuclear Corp in September to develop uranium mines in September and an agreement with Wuhan Iron and Steel for a project in Liberia in April.
  • In May 2010 Jinchuan appeared to seal exactly the same deal with the China Development Bank as investment partner and a 51% share coming in Chinese hands. The 6% stake going to the Micawber investment group is the result of arbitration over cash funding and compliance with black empowerment rules.
  • The estimated cost to dig the mine northwest of Johannesburg is “similar” to a 2009 estimate of 6.6 billion rand ($960 million) and it could start production around 2013 (Source: BusinessWeek)

Implications:

  • The China-African Development Fund is one of the many state-controlled investment vehicles the Chinese government is using to help the domestic mining companies expand internationally. China Development Bank and China International Fund are more well-known investment partners. It is unclear why this deal was transferred from the China Development Bank to the China-African Development Fund.
  • As more Chinese mining companies go public to raise money, the need for government assistance in foreign investment will be reduced in the long term. However, the government assistance through development banks and funds will play an important role in defining which Chinese mining companies will become the domestic champions that arise from industry consolidation.

©2010 | Wilfred Visser | thebusinessofmining.com

Rio moves closer to Ivanhoe takeover

December 9, 2010 Comments off

“Rio Tinto has moved closer to taking over Canada’s Ivanhoe Mines, owner of a vast Mongolian mining project, after Rio pledged up to $4.3bn in a multi-pronged financing deal that will boost Rio’s stake in Ivanhoe to 42 per cent from 35 per cent. Rio and Ivanhoe, the vehicle of mining entrepreneur Robert Friedland, also suspended arbitration surrounding their joint development of Oyu Tolgoi, a deposit that is expected to be one of the world’s biggest new sources of copper and gold.

In a complex agreement reached on Wednesday Rio will finance the completion of Oyu Tolgoi in exchange for options that allow it to raise its equity stake in Ivanhoe to 49 per cent by January 2012. In that month the 49 per cent shareholding cap lapses, allowing Rio to buy additional shares. Ivanhoe shares fell 13 per cent in early Toronto trading, as the prospect of an alternative buyer for Ivanhoe receded.”

Source: Financial Times, December 8 2010

Observations:

  • In July of this year Rio Tinto announced its intention to take control of the Oyu Tolgoi operation by increasing its share in Ivanhoe. However, the board of Ivanhoe made it hard for the company to gain a majority stake of the company.
  • The company is in full development of the operation in Mongolia, planning to start production in 2013. However, to have good access to the Chinese market the rail infrastructure connecting Mongolia and China needs to be improved.

Implications:

  • Most likely Rio Tinto will increase its stake of Ivanhoe rapidly after January 2012, as the Oyu Tolgoi deposit promises to be highly profitable if current copper price levels persist.
  • For some time rumors about potential involvement of an additional Chinese investor for the mine were going around. However, though strengthening ties with the Chinese industry and government last month, Rio has indicated to prefer developing the deposit without additional support.

©2010 | Wilfred Visser | thebusinessofmining.com

Xstrata steps up spending plans

December 8, 2010 Comments off

“Xstrata, the acquisition-built mining company, is once again stepping up spending on its internal portfolio, budgeting $23bn for new mines, smelters and other expansionary projects between 2011 and 2016. Expansionary capital expenditure – or spending exclusively on new projects, rather than the maintenance of old ones – for 2011 and 2012 is forecast at $6.8bn. That compares with expansionary capex of $4.5bn in 2010.

According to Xstrata, high spending in the two years to 2012 will put it over the hump in terms of funding construction of the projects expected to enter service this decade.”

Source: Financial Times, December 7 2010

Observations:

  • The $22.8bln CapEx to 2016 is the result of an increase of the 2011-2012 budget by $1.3bln to $13.6bln and investment plans of $5.0bln for 2013; $1.8bln for 2014; $1.5bln for 2015 and $0.9bln for 2016.
  • Projects expected to be approved in the near term are: Rolleston expansion; Oaky Creek expansion; Cerrejon expansion; Tweefontein; Fraser Morgan; Kabanga; Mt Isa Zinc expansion; and the MRM expansion. The bulk of the investments are in coal (36%) and copper (35%).

Implications:

  • Xstrata earmarks large amounts of cash of development projects, but preserves the flexiblity for further growth by acquisitions. Although the company has not benefited as much from high iron ore prices as major competitors due to lower exposure to the iron ore price, the gearing of 19% gives the company the flexibility to make significant acquisitions.
  • Just like for Rio Tinto the importance of good ties to the Chinese market becomes ever greater. As China is rising in importance as a copper and coal producer, Xstrata will be looking for access to the local market by partnering with Chinese players. Zijin might be a logical partner, although collaboration in the Tampakan deposit in Indonesia has not taken off.

©2010 | Wilfred Visser | thebusinessofmining.com

Rio Tinto unveals investment plans

November 29, 2010 1 comment

“Tom Albanese, chief executive, Rio Tinto said: ‘We believe the first and best use of our strong cashflows and robust balance sheet is to invest in the excellent range of value-adding growth projects across Rio Tinto’s product portfolio.

The long-term industrialisation and urbanisation story in developing countries continues apace. Over the next 15 to 20 years, this will lead to a doubling in iron ore, aluminium, and copper demand which will require a significant supply response. With our large suite of low cost, large scale, expandable assets along with our core skills in operating excellence, exploration, technology and innovation, we are very well positioned, and are investing to take full advantage of these opportunities.'”

Source: Rio Tinto, November 26 2010

Observations:

The plans presented to the investor community include:

  • $13bln expected investments up to end of 2011, including $4bln for 2010;
  • 50% capacity expansion in Pilbara over 5 years, leading to $130/tonne costs for added capacity;
  • Copper output for 2010 at 661Kt, increasing from 2013 due to Oyu Tolgoi;
  • Over $2bln planned investment in copper assets.

Implications:

  • Copper production comes down from 800Kt in 2009, a productivity drop of close to 20%, mainly attributed to grade variation. As copper accounted for 14% of revenues in 2009 this is a significant hit on the income statement.
  • Though the expansion of Pilbara will give Rio Tinto crucial access to iron ore, the estimated $130/tonne give a signal to steel producers that the ore costs will not permanently return to levels below this threshold.
  • Rio Tinto appears to have recovered from the bad competitive position when entering the downturn, but it still is a small buyer of assets in the industry compared to the major competitors.

©2010 | Wilfred Visser | thebusinessofmining.com

Mongolia confident IPO will ease doubts

October 8, 2010 Comments off

“Mongolia’s pitch to become the new frontier for metals and mining is facing renewed scrutiny from investors around the world as a Mongolian coal miner completes a landmark listing in Hong Kong.

Mongolian Mining Corp (MMC) is set to raise at least $650m after pricing its shares on Tuesday in Hong Kong in the middle of a target range set by advisers JPMorgan and Citi.

The initial public offering, representing 20 per cent of the company’s equity, creates the first homegrown, multibillion-dollar miner in a country that possesses little capital or infrastructure, but vast deposits of coal, copper and gold.”

Source: Financial Times, October 5 2010

Observations:

  • MMC holds the license to part of the enormous Tavan Tolgoi coal field. The government says this field is perfectly suited to export coal to the Chinese market. The government is planning to sell 50% of the ownership of the deposit to investors.
  • Tavan Tolgoi is located in the south of Mongolia, in the same area as Oyu Tolgoi, a copper deposit partly owned by Rio Tinto via Ivanhoe Mines.

Implications:

    Potential infrastructure - Ivanhoe explanation

  • In order for foreign investors to invest in the coking coal deposit, the government will need to invest heavily in infrastructure. Both transportation to the mine (and from the mine to China) and availability of water in the region are concerns the government will have to answer to.
  • Cooperation between the develop of Tavan Tolgoi and Oyu Tolgoi by extending the required 290km railway connecting Oyu Tolgoi to the Chinese rail network to the Tavan mine appears to be inevitable.

©2010 | Wilfred Visser | thebusinessofmining.com

Rio Tinto to expand diamond operations

September 16, 2010 1 comment

“A bullish outlook for precious stones has prompted Rio Tinto, the London-listed miner, to spend $800m (£518m) expanding its diamond operations. The mining group is primarily focused on iron ore, copper and coal, but has a diamond business that is sometimes overlooked in spite of being the third-largest in the world behind industry leaders De Beers and Alrosa. Rio’s division is based on two mines, including Argyle in the Australian desert.

Rio said on Tuesday that it would spend $803m to construct an underground mine at Argyle, a plan it authorised in 2005 then froze when the financial crisis hit. The expansion will push Argyle’s productivity from 10.6m carats last year to about 20m annual carats in the years leading up to the mine’s closure in 2019, said Harry Kenyon-Slaney, chief of Rio’s diamond and minerals arm.”

Source: Wall Street Journal, June 8 2010

Observations:

  • Rio decided in 2005 to start development on the transition from open pit to underground mining at the Argyle diamond mine in Western Australia. Low global demand and uncertainty about capital conditions forced the company to freeze this decision for several years.
  • The company is mainly active in the production of industrial diamonds, although part of Argyle’s production (the pink diamonds) are used in jewellery. Expansion of Diavik diamond mine is one of Rio’s key capital projects at the moment.

Implications:

  • Global demand for both industrial diamonds and stones for jewellery mainly depends on the Chinese economy. De Beers, among others, is actively trying to improve the image of diamonds in the Asian market. Industrial diamonds, used for cutting and sawing, clearly depend on the growth of construction and industrial sectors.
  • Development of an underground mine at Argyle can be performed rapidly, as an exploration drift can be expanded in order to develop the underground infrastructure. Underground production could therefore start within 2 years.

©2010 | Wilfred Visser | thebusinessofmining.com