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Posts Tagged ‘Africa’

Vale woos Guinea with social projects

July 11, 2011 Comments off

“Vale’s finance chief said the Brazilian miner would invest in development programmes in Guinea in an attempt to safeguard a $2.5bn mining concession and avoid making a large pay-out to the African country’s new government. In spite of still being vulnerable to a review of mining licenses in Guinea, Guilherme Cavalcanti said that Vale could win the government’s approval for its Simandou iron ore project that it shares with rival Rio Tinto by paying for education and agriculture in the communities where it mines.

‘Our approach to Africa in Guinea is not to become only a mining extraction [company] but bring country co-operation,’ he said. ‘So, as we do in Mozambique, we can help people in agriculture, we can help in education, we can train local people … So it’s more an approach to communities as well, not only mining extraction.’

Rio Tinto only gained clear tenure in Guinea in April after promising the government $700m in cash as well as rights to take up to a 35 per cent stake in Simandou. Simandou, one of the highest-quality untapped iron ore resources in the world, has attracted the two largest iron ore miners to Guinea despite the country’s history of volatile dictatorship, weak rule of law, and recurring threats of licence renegotiations.”

Source: Financial Times, July 6 2011

Observations:

  • The Simandou deposit is divided into 4 blocks: Vale controls blocks 1 and 2 with the Benny Steinmetz Group (BSG) as minority shareholder; Rio Tinto controls blocks 3 and 4 of the Simandou deposit, working together with Chalco. In an earlier stage Rio Tinto held title to the full deposit, but the Guinean government cancelled this deal.
  • In a review of mining licenses announced in March the Guinean government requires a minimum of 33% of ownership of strategic mining projects in the country to increase government control.
  • Rio Tinto struck a deal on the redistribution of ownership at the end of April, setting up a long term phased process of acquisition of ownership by the government. Furthermore the company agreed to a conditional one time $700mln payment to the government and promised to develop a railway to export the ore via a Guinean port.

Implications:

  • The social projects promised by Vale are a mere hygiene factor in the negotiations about transfer of ownership. The government will clearly expect any operating partner to take an active role in community development. However, Vale’s experience with large scale operations in developing areas in Brazil and Mozambique might help to gain trust.
  • Most likely Vale will agree on a conditional and phased deal similar to Rio Tinto’s agreement with the government. The agreement will be designed to make any payments or ownership deals conditional on crucial milestones and actions by the government. Vale will still need to decide on a way to export the ore, either negotiating to use the railway build by Rio Tinto, or setting up the infrastructure to export via Liberia.

©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

Chinalco not planning to sell Rio Tinto stake

April 5, 2011 Comments off

“Chinalco, the Chinese aluminium group, has no plans to sell down its shares in Rio Tinto, viewing the mining house as a key strategic partner as Chinalco expands overseas. ‘We can’t go out to fight alone,’ said Chinalco chairman Xiong Weiping, explaining that co-operation with global miners was essential for overseas development. ‘With Rio being one of the top mining companies in the world, Chinalco can learn a lot from them, including in operational management, asset operation and risk management.’

Chinalco is seeking to move into mining to take advantage of the commodities bull run that has been created by China’s huge demand for raw materials such as iron ore, copper and coal. Mr Xiong outlined their plans to expand from their core aluminium business, which has struggled to make profits, into a global mining house. He said he was hunting for high-grade copper, bauxite, iron ore and coal resources, the minerals that China needs to fuel its urbanisation. ‘Our target areas are mainly countries next to China, for example south-east Asia, Mongolia and central Asia,’ said Mr Xiong.”

Source: Financial Times, April 3 2011

Observations:

  • Aluminum Corporation Of China Limited, Chinalco, and Chalco are often used interchangeably, as they are basically the same company. Chinalco is the state-owned holding company of Chalco, which is listed on various exchanges with a small part of ownership.
  • Chinalco signals its interest in partaking in the Oyu Tolgoi copper project in Mongolia, which is operated by Rio Tinto. Until now Rio Tinto has held away potential contributors to the project.

Implications:

  • With China’s mining sector growing in international importance it would be no more than logical if some of the largest diversified miners in the world in 10 years time are from China. In the domestic struggle to be this player state support will be crucial. Chinalco is positioning itself to be the Chinese diversified miner and desperately needs strong international connections to support this claim.
  • In the short and mid term the strategic stake of the company in Rio Tinto certainly is a symbiotic relationship, as demonstrated by investments in Africa and exploration partnership in China. However, if Chinalco grows into an international diversified miner as it is planning, in the long term the companies will become fierce competitors. At this point the stake in the Australian company will certainly cause conflicts.

©2011 | Wilfred Visser | thebusinessofmining.com

Guinea: Mining Fight Shows Pressure on Multinationals

January 28, 2011 Comments off

“Alpha Condé, the new president of Guinea, pledges to do what none of his predecessors have: Harness vast iron-ore reserves contained in the Simandou mountain chain to give the West African country one of the continent’s most prosperous economies.

To succeed where others have failed, Mr. Condé is revisiting an existing Simandou mining contract with Anglo-Australian miner Rio Tinto, as well as other pacts signed by his predecessors. Foreign investors, no matter how big, will have to follow rules or leave Guinea, he says.

In Guinea, the Simandou contracts are just some of several that are under review in disputes with companies from Russia, China and the U.S. And the outcome of the Simandou dispute is likely to rattle at least one powerful international investor: either Rio Tinto or rival Vale SA of Brazil. Aluminum Corporation of China also has a dog in the fight.”

Source: Wall Street Journal, January 27 2011

Observations:

  • Rio Tinto has teamed up with Chinalco to develop its part of the Simandou deposit (although it is still unclear which part it is exactly entitled to). The Chinese pay $1.35bln for infrastructure development, giving it the right to buy the ore from Rio Tinto.
  • The Guinean government is keeping a close watch on the development plans, pressuring the companies to file plans and start investments, threatening to revoke licenses granted in earlier stages.

Implications:

  • The export of the Simandou iron ore is an interesting case of shared responsibility of corporates and government in infrastructure development. The shortest route to the sea would be a direct link through Liberia, but the infrastructure development to ship the ore through a Guinean port is one of the main benefits the Guinean government could achieve from the involvement of the foreign companies. The government will therefore have to find a balance in pressuring the companies to invest and investing itself to convince the companies to skip the Liberia-alternative.
  • Vale smartly managed its transaction of BSG’s share of the Simandou asset by making 80% of the $2.5bln payment conditional on achievement of specific milestones, limiting the country risk it is exposed to. These types of conditional deals are likely to be the way to move forward in order to limit risk in many countries that are struggling to become more stable and attract investment.

©2011 | Wilfred Visser | thebusinessofmining.com

Retailers Fight to Escape ‘Conflict Minerals’ Law

December 2, 2010 Comments off

“Top U.S. retailers including Wal-Mart Stores Inc. and Target Corp. are battling to limit a new federal law that could force them to report whether their store-brand goods contain minerals from war-torn Central Africa.

The requirement, part of the Dodd-Frank financial law passed in July, aims to pressure companies to spurn so-called conflict minerals—tin, tantalum, tungsten or gold from parts of the Democratic Republic of Congo or neighboring countries. Income from those minerals is blamed for fueling violence that has claimed millions of lives in eastern Congo, which a senior United Nations official recently branded the world’s rape capital.

Under the new law, public companies using any of the four minerals from Central Africa must report what steps they have taken to verify the minerals weren’t taxed or controlled by rebel groups. Products that don’t contain minerals that benefited such groups can bear the label “DRC conflict free.” Companies that fail to verify their sources can still sell their products, but could face embarrassment.”

Source: Wall Street Journal, December 2 2010

Observations:

  • Retailers don’t want to report what they did to control sustainable and responsible extraction and trading of the minerals used in their white label products. The law is designed to force sellers to disclose the sources they use for their products in order to make the use of ‘conflict minerals’ transparent to the public.
  • Similar government, industry and NGO-driven initiatives are deployed around the world, especially in the area of precious metals and gemstones.

Implications:

  • The new law forces ‘downstream’ retailers of final products to become more involved in the ‘upstream’ mining of the products. As miners have to comply with supply chain standards of the customers, the value chain becomes more integrated and more demand driven.
  • It is likely the mining industry will have to implement a REACH-like system to track and report the supply and origin of its products. Although it might take a decade or more to establish an industry standard, various miners are starting to implement internal systems.
  • The retailers are assuming a similar strategy as Nike did in the sweatshop supply problems it faced, taking the viewpoint that they are not responsible for the social responsibility of their suppliers. However, as complying to the new law would not cost them much and the potential consumer reaction is large, they would better give up their resistance and lead the change.

©2010 | Wilfred Visser | thebusinessofmining.com

Congo resolves dispute over copper mine

October 27, 2010 Comments off

“Freeport-McMoRan, the US copper mining group, has resolved a long-standing dispute with the Democratic Republic of Congo over control of a vast copper mine by giving cash and shares to the government.

The Tenke Fungurume project, which could be ranked among the world’s top 10 new sources of copper, has been plagued by uncertainty since 2007, when Congo’s government decided to review all mining licences signed during the war in the country between 1998 and 2003.

More than a year of negotiations, thought to have involved the US government in support of Freeport, led to changes to the Tenke licence. Under the new terms, Gecamines, the state mining company, will own 20 per cent of Tenke, an increase from 17.5 per cent. Freeport will pay $30m to Congo “in six instalments after reaching certain production milestones”, as well as $5m in “surface area fees”. “

Source: Financial Times, October 26 2010

Observations:

  • The development of the deposit, staring early 2009, has not stopped during the dispute. However, full production has not yet been reached.
  • The Tenke deposit is owned by Freeport-McMoran and Lundin Mining. Furthermore Gecamines, the state-owned mining company of Congo, holds 20% of the mine’s shares.

Implications:

  • The arrangement between Freeport-McMoran and the government of Congo could be seen as a model for other land right and mining arrangements between foreign mining companies and African governments. A fee for access to the land helps the government to invest in infrastructure, while the parties both commit to the success of the project by tying the payments to production milestones and by both holding a shares of the project.

©2010 | Wilfred Visser | thebusinessofmining.com

Not all Chinese Cash Boosts Commodities

June 3, 2010 Comments off

“It is rarely a good idea to become overly reliant on one customer. Especially when that customer is trying to build a rival supply business of its own. China accounts for 36% or more of global demand for metals like copper, aluminum and zinc, according to Barclays Capital…

One big risk with a key customer is that its appetite wanes. Another, less obvious one, when it comes to China is its effect on the supply side.

China’s approach to dealing with its shortages of raw materials is ‘to throw money at it,’ says Jennifer Richmond at Stratfor, a global intelligence firm. Chinese firms have spent $79.6 billion acquiring foreign natural-resources producers since the start of 2008, according to Dealogic. Meanwhile, Beijing has struck deals from Russia to Africa offering loans and infrastructure development in exchange for minerals.”

Source: The Wall Street Journal, June 2 2010

Observations:

  • Using various investment funds, banks and state-controlled companies, China has invested in building production capacity across the world. Not only in Africa, but also in Australia and Asia the Chinese are building a supply foothold.
  • WSJ’s Denning argues that the increase of production capacity caused by the Chinese investments will eventually lead to overcapacity and thus to decreasing commodity prices.

Implications:

  • The potential oversupply created by Chinese investments is certainly a long term issue. Most investments in the mining industry do not lead to output in a period shorter than 5 years. Many things can happen to the demand in that period.
  • Apart from the need to build capacity to satisfy the demand increase, the surge in investments in exotic places is driven by the decreasing ore quality of the average new mine. Companies need to mine lower grade ores in more extreme places. As the investment required per ton of output increases, the investments will not necessarily increase supply at the same levels as demand. As long as China grows at 10% per year, it is going to be very hard to keep up in terms of production.

©2010 – thebusinessofmining.com