Mining Week 47/’12: BHP sells diamonds; Anglo pays for iron ore
November 18, 2012
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Top Stories of the Week:
- Harry Winston buys BHP’s diamond business for $500m
- Diamond retailer Harry Winston has decided to buy BHP Billiton’s diamond business for $500m cash. The business consists of 80% of the EKATI diamond mine in Northern Canada and sorting and marketing units.
- Both BHP Billiton and Rio Tinto put their diamond businesses up for sale this year. Rio Tinto might be reconsidering that decision as it couldn’t secure a good price for its Diavik mine and its Indian holdings have come back with good exploration results.
- Sources: BHP Billiton press release; Harry Winston press release; Financial Times
- Anglo’s Minas Rio iron ore project delayed and more expensive
- Anglo American announced that Minas Rio, its 26.5Mtpa iron ore project in Brazil, will not start producing before the second half of 2014. The delay is caused by license issues around construction of power transmission lines.
- Anglo also announced that the total capital cost for the project is “unlikely to be less that $8.0bn”, making this the first major iron ore project which costs more than $300 per millions tonnes capacity.
- Sources: Anglo American press release; Reuters; mining.com
- Qatar’s support appears to seal GlenStrata deal
- The Qatar Sovereign wealth fund has announced it will support Glencore’s offer of 3.2 shares per share for Xstrata, making it very likely that the largest mining deal of the past years will become reality. Xstrata’s shareholders get to vote on Tuesday.
- Qatar, Xstrata’s 2nd largest shareholder after Glencore, also announced it will abstain from voting on the retention incentive package for Xstrata top management, making it very likely that this >$200m retention package will not become reality.
- Sources: Qatar holding; Financial Times 1; Financial Times 2
Trends & Implications:
- Anglo’s issues in Brazil demonstrate the enormous importance of getting power issues for large projects sorted out early. Last month Rio Tinto’s enormous Oyu Tolgoi project in Mongolia was only hinging on a power supply agreement with the Mongolian and Chinese governments. Many projects in developing countries either need to secure power supply from other countries or have to build their own power plants, forcing them to go through tremendous licensing issues and import natural resources to get their operations powered up.
- When the Xstrata retention package is voted down, a big group of top-level executives at Xstrata can be expected to start looking for new jobs quickly, opening up a great pool of talent for other companies. The corporate cultures at Xstrata and Glencore are so different that many miners will have to adjust to the more aggressive, top-down culture of the trading house. Many of the top managers will prefer to find a good job in another mining house instead.
2012 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
acquisition, Anglo American, BHP Billiton, Brazil, business, Canada, diamond, Ekati, Glencore, GlenStrata, Harry Winston, iron ore, license, Minas-Rio, mining, mining business, power, Rio Tinto, Xstrata
Mining Week 46/’12: Lonmin vs. Xstrata & the CEO-carousel
November 10, 2012
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Top Stories of the Week:
- Lonmin raises equity to stay independent
- Lonmin announced a $800m rights offering, in that way fending of the proposal by Xstrata to increase its stake in the troubled platinum miner to a majority share.
- The strikes in South Africa, which escalated at Lonmin’s operations, have caused significant lost production and urgent financial issues for Lonmin.
- Sources: Lonmin press release; Financial Times; Wall Street Journal
- BHP starts search for new CEO
- BHP Billiton has started the search for the successor of CEO Marius Kloppers. Apparently the company will not necessarily promote an insider to the top position.
- With Mick Davis leaving Xstrata if/when the merger with Glencore is approved and Cynthia Carroll leaving AngloAmerican next year, 3 of the top CEOs in the mining industry will change.
- Sources: Financial Times 1; The Economist; Financial Times 2
- India limits export of iron ore
- Iron ore exports from the Indian state of Orissa will be limited strongly by new production quota for mines without processing facilities.
- The government is trying to attract processing investment to prevent iron ore is only exported without significant benefit for the country. High export duties (raised to 30% early this year) and production quota are used to discourage exports from the world’s 3rd largest iron ore exporter.
- Sources: Wall Street Journal; Commodity Online; Steel Orbis
Trends & Implications:
- Orissa’s attempts to curb exports don’t do much to stimulate local investment in processing capacity. India’s government announced a year ago that it would make it more attractive for companies to invest by setting up mining right and process plant permitting packages. With the current uncertainty about both global demand and India’s local demand outlook it is unlikely that large investments in additional processing capacity will be made in Orissa in the near future. As a result the will mainly slow down the local economy.
- Almost a year ago, after the announcement of Ferreira as new CEO of Vale, this blog conducted a poll among its readers to find out which top company CEO was mostly to be replaced first. The results showed most trust in the future of Kloppers at BHP. A year later 3 out of 4 are on their way out, while most CFOs have been replaced over the past 2 years too. The high level of activity in replacing top executives indicates a change of mindset in the boards of these companies: shifting from a focus on growth and investment to a focus on operational excellence and payout. The new group of top executives will mainly need to show a track record of cost-control and willingness to make tough decisions on closure of mines.
Results of Dec-2011 Poll on thebusinessofmining.com
2012 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
Anglo American, BHP Billiton, business, Carroll, CEO, Davis, Glencore, India, iron ore, Kloppers, Lonmin, mining, mining business, Orissa, rights issue, Rio Tinto, strike, Vale, Xstrata
Mining Week 45/’12: PotashCorp and Rothschild on the offensive
November 4, 2012
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Top Stories of the Week:
- PotashCorp in talks to acquire ICL for $14bn
- PotashCorp, the Canadian phosphate miner that was subject of a $39bn takeover attempt by BHP Billiton in 2010, is in talks with the Israeli government to acquire Israel Chemicals (ICL) and merge it with its own operations. PotashCorp already holds a 14% stake of ICL. The remaining share is worth roughly $14bn.
- In an initial reaction the Israeli government, which holds a golden share in ICL’s mother company, indicated that the sale of ICL to PotashCorp would not be in the best interest of the country. In a later statement the government did indicate it would be open to a formal bid.
- Sources: Wall Street Journal; BusinessWeek; Fox Business
- Rothschild aims to increase Berau interest
- In response to Bakrie’s proposal to buy out Bumi plc, Nathan Rothschild, the company’s founder, is said to look for partners to make a counterbid for Berau’s Indonesian coal assets.
- Bumi Resources and Berau are the two key asset groups of Bumi plc, the result of a deal between Vallar plc and Bumi. Following falling call prices minority shareholder Bakrie has proposed a deal in which it would buy Bumi plc’s assets and thus separate Rothschilds and Bakrie’s interests.
- Sources: Wall Street Journal; Financial Times; Bloomberg
Trends & Implications:
- The Israeli response that selling ICL would not be in the country’s interest might be preliminary. Although 60% of ICL’s mining activity takes place in Israel, centered around the Dead See, it is unlikely that PotashCorp would want to tune down those activities. Only a very small part of ICL’s production is actually sold in Israel, and those products could be seen as global commodities, making it hard for the government to justify a case in which a sale would be rejected based on national security. The issue that PotashCorp and Israel will need to figure out is how much overhead jobs to leave in the country and/or how to compensate for the potential loss of jobs in office activity (similar to the negotiations undertaken by BHP Billiton with the Canadian government when trying to acquire PotashCorp).
- Rothschild’s attempt to find new partners to continue his Indonesian activities with Berau does not seem te be a step that is in the interest of shareholders. Entering in a bidding contest with Bakrie for the assets it already controls is not going to improve the financial position of a company plagued by dropping commodity prices. If Bakrie actually manages to secure the funds required to execute the buy-out proposal it is likely that Rothschild will be able to find other, less politically sensitive, cheaper assets to work with. Whatever the result of this power struggle, it appears that Bakrie and Rothschild will not continue to own stakes of the same company.
2012 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
acquisition, Bakrie, Berau, Bumi, business, coal, fertilizer, ICL, Indonesia, Israel, Israeli Chemicals, mining, mining business, potash, Rothschild
ICMM: Trends in the Industry
October 21, 2012
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The International Council on Mining and Metals (ICMM) published 2 new reports this week:
Trends in the Mining and Metals Industry
This 16-summary of where the industry is coming from and where it is going mainly gives an interesting perspective on geographic developments in the mining industry. The report shows how center of mining activity has shifted from Europe, via the US, to the BRIC countries and new frontiers. At the same time the report illustrates how a large part of processing capacity still is located in the developed world, though China’s processing surge is instrumental in changing this situation.
The report in summary:
- Center of mining is shifting to new frontiers, including BRIC countries;
- Iron ore, gold, and copper continue to account for roughly two-thirds of value of global mined metals;
- Large companies are responsible for an increasing share of global production;
- With lower average ore grades, bulk open-pit mining is more and more the mining method of choice;
- Human resource challenges are becoming restrictive;
- China-led nationalized mining is leading to a global increased in state participation in mining companies.
The role of mining in National Economies
This report presents a Mineral Contribution Index (MCI), ranking countries’ dependency on the mineral industry. The index includes:
- The percentage contribution of the mineral industry to export value;
- The change in this contribution over a 5 year period;
- The mineral production value as percentage of GDP.
The top 25 countries according to the ranking with their respective scores are displayed below.
Categories: Market change
BRIC, business, export, frontier, GDP, human resources, ICMM, industry, Mineral Contribution Index, mining, mining business, open pit, processing, report, trend
Mining Week 42/’12: Bakrie vs. Bumi
October 13, 2012
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Top Stories of the Week:
- Bakrie proposed to buy Bumi’s assets
- The Bakrie Group, which owns approx. 24% of Bumi Plc, has an offer to buy Bumi plc’s assets (Berau and Bumi Resources) and leave the London listed miner active in Indonesia behind as a cash shell. The group previously held 48%, but sold 24% to Borneo Lumbung to ease debt issues.
- Bumi’s share price has dropped 80% versus the high in July 2011 on the back of low coal prices and governance issues.
- Sources: Financial Times 1; Financial Times 2; Wall Street Journal
Bumi plc structure: London listed miner owns a stake in Berau coal and Bumi resources.
- BHP Billiton seeks to cut costs
- BHP Billiton announced it would cut jobs in an attempt to cut costs in its iron ore division, attempting to preserve margins at low iron ore prices.
- The company also recently initiated cost reduction measures in its base metal operations and announced a freeze of executive compensation.
- Sources: BHP Billiton Base Metals briefing; International Resource Journal; Wall Street Journal
Trends & Implications:
- Bakrie’s move to leave Bumi plc could imply the end of the Indonesian coal ambitions of Rothschild’s venture. If Bakrie finds the money to execute the deal, it offers other shareholders an opportunity to limit their losses. Bumi could try to reinvent itself and buy assets in other regions with the cash received for Bumi resources and Berau, but it would start with significantly less cash to acquire companies than in its attempt in 2011.
- The updated M&A share attractiveness tracker shows a relative leveling of the playing field in terms of mega M&A over the past month. South African listed companies clearly took a major hit, but as the outlook for these companies deteriorated at the same time the shares have not gained much attractiveness from an acquisition standpoint. Fortescue managed to fend of urgent debt issues and saw its share price rise, but it remains one of the more attractive acquisition targets. BHP Billiton lost its position as the best positioned acquirer as outlook for the company deteriorates with the expectation of slowing global demand.(
2012 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
acquisition, Bakrie, base metals, Berau, BHP, Bumi, business, coal, cost cutting, Fortescue, Indonesia, iron ore, job, jobs, merger, mining, mining business, Rothschild, share
Mining Week 42/’12: South Africa strikes; Glenstrate voting scheme
October 8, 2012
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Top Stories of the Week:
- South African strikes spread; workers fired
- Illegal (wildcat) strikes in South Africa have spread to more or less all major miners in the country. Anglo American’s Kumba iron ore and platinum operations are faced with production disruptions, as are Xstrata, GoldFields, Anglogold, and most other major mining houses in the country.
- South African strikes escalated when police shot down Lonmin strikers. After Lonmin agreed to a 22% wage increase workers in other companies demanded similar increases, bypassing the traditional unions. Several companies are trying to set up structured wage discussions to come to a collective agreement.
- AngloAmerican’s Amplats decided to fire 12 thousand striking workers, which is a fifth of its total workforce.
- Sources: Anglo American press releases1 2; Financial Times 2; wall Street Journal
- Xstrata board recommends Glenstrata deal and complicates voting
- Xstrata’s board of directors issues advice for the company shareholders to accept the merger proposal to form Glenstrata. The voting structure has been set up to assess support for a deal both with and without an extensive retention package for Xstrata’s top management.
- Shareholders will vote first on the merger proposal both including and excluding the retention package, requiring a 75% majority excluding Glencore’s votes. Then the vote on the retention package will be done separately, requiring only a 50% majority of votes.
- Sources: BusinessWeek; Financial Times
Trends & Implications:
- The voting scheme is set up by Xstrata’s board to have a safety net for the deal in case the shareholders don’t accept the management retention package. The Qatari sovereign wealth fund is the largest shareholder that can vote on the merger deal; it has not voiced its opinion on the improved Glencore offer and on the management incentives, but insiders indicate the group considers retention of Xstrata’s officers a key priority. Key unknown in the voting mechanism is whether or not the results of the first two questions (on the merger) are made public before the 3rd vote on the retention scheme.
- The unrest in South Africa is much wider than the mining industry, and as such requires solutions that are much broader than the industry. In the short term a large part of the workers might return to work with a significant increase in wages as demonstrated in the Lonmin case. However, as long as this increase does not span across the industry the workers that have not been given a raise will turn to strikes to stress their demands. The mining houses will have to work nationwide to find a sustainable solution for the industry, which is hard because South African miners operate on the high end of the global cost structure for many commodities. The task is even harder when taking in account that social unrest will continue as long as the issues in related and supplying industries continue.
2012 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
acquisition, bonus, business, Glencore, GlenStrata, gold, incentive, Lonmin, merger, mining, mining business, platinum, South Africa, strikes, union, Xstrata
Mining Week 39/’12: Fortescue moves on; GlenStrata almost there
September 22, 2012
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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
Categories: Mining Week
acquisition, board, business, China, clientele, debt, Fortescue, Glencore, grid, iron ore, merger, mining, mining business, Mongolia, power, refinancing, Rio Tinto, shareholders, Xstrata
Mining Week 37/’12: Glencore increases bid to take over Xstrata
September 8, 2012
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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
Categories: Mining Week
business, CEO, directors, Glasenberg, Glencore, GlenStrata, merger, Mick Davis, mining, mining business, offer, share ratio, shareholders, takeover, Xstrata
Mining Week 36/’12: Anglo and Codelco compromise; Glenstrata in doubt
August 31, 2012
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Top Stories of the Week:
- Anglo American and Codelco reach a deal on the Sur Complex
- Anglo agreed to sell a minority stake of its Chilean Sur Projects to Codelco at a significant discount, but the company receives over $2bn more than Codelco would have to pay according to its disputed buy-in option.
- Codelco partners with Mitsui in a JV that receives a 24.5% stake of the project.
- Codelco’s union representative voted against the new deal, announcing action to improve the terms for the Chilean company.
- Sources: Financial Times 1; Wall Street Journal; Financial Times 2; Financial Times 3
- Norwegian fund joins Qatar in opposition of Glenstrata merger
- Analysts speculate about a potential compromise on the price paid for Xstrata by Glencore: Glencore offers 2.8 shares per share of Xstrata, but Qatar’s sovereign wealth fund earlier indicated it would require a 3.25 ratio. In a new statement in which the fund says it will vote against the proposed deal the 3.25x ratio was not reiterated.
- Norges Bank Investment Management has also build up a significant stake in Xstrata. The Qatari fund could be able to block the merger alone (depending on its current ownership level) or with the help of a few other investors.
- Sources: Financial Times 1; Wall Street Journal; Financial Times 2
- Australian politicians struggle with mining ‘boom’ approach
- Iron benchmark ore prices continue to decrease, loosing more than 50% vs. the peak around $200/wmt early in 2011 and 36% year to date. The profits of the iron ore dependent miners has followed this trend.
- Royalties and income taxes on mining firms are an important pillar of the Australian budget, built for a large part around the newly introduced Mineral Resource Rent Tax. Several Australian politicians have expressed their concern with the perspective of a significant reduction of tax income. The MRRT alone was planned to bring in over $6bn of government income, but because of the progressive nature of the tax the income will be very small at current price levels.
- Sources: Wall Street Journal; Financial Times; text
Trends & Implications:
- Xstrata’s shareholder vote on the proposed merger with Glencore is anything but a done deal. Several large shareholders want Glencore to sweeten the offer of 2.8 shares of Glencore per share of Xstrata. However, the actual share ratio has been hovering around 2.65-2.70 since mid May, indicating that a significant share of the market expects the ratio to drop if the deal does not go on. Xstrata has higher value for Glencore than for current shareholders, but it is unlikely the company will want to pay more than the proposed 2.8x ratio and give all of that additional value to Xstrata’s current shareholders.
2012 | Wilfred Visser | thebusinessofmining.com
Categories: Mining Week
acquisition, Anglo American, Australia, business, Chile, Codelco, deficit, exchange ratio, Glencore, GlenStrata, iron ore, merger, mining, mining business, Mitsui, MRRT, Sur, tax income, Xstrata
Top Miner’s M&A History
Gold Miner’s M&A History
