Archive
Mining Week 1/’13: Anglo and Mittal sell iron ore assets
Top Stories:
- Anglo and Cliffs sell 5Mtpa Brazilian iron ore mine
- Anglo American and Cliffs Natural Resources sell their 70% and 30% stakes in the Northern Brazilian Amapa iron ore mine to private miner Zamin Ferrous for approx. $400m. A year after buying their 70% share 4 years ago, Anglo took a $1.5bn writedown on the asset.
- Sources: Anglo American; Financial Times; Reuters
- Bumi looses $422m in derivatives trading
- Bumi Resources, partly owned by Bumi plc and part of the dispute between the Bakri family and Nath Rotschild about the future of Bumi, posted a loss over the first 9 months of 2012 driven by low coal prices and a loss of over $400m on derivatives.
- The loss on derivatives value was driven by a re-calculation of early payment rights, changing the discount rate of the value of that option from 5.25% to 17.2%.
- Sources: Bumi Resources results; Financial Times; Wall Street Journal
- ArcelorMittal sells 15% stake of Labrador Trough for $1.1bn
- Cash-hungry steel maker and miner ArcelorMittal decided to sell a 15% stake of its Labrador Trough iron ore project in Canada to Chinese steel maker Posco and Taiwanese steel maker China Steel, also signing long-term offtake agreements.
- Sources: ArcelorMittal press release; Financial Times; The Hindu
Trends & Implications:
- The sale of iron ore mines or stakes by ArcelorMittal and AngloAmerican signal 2 different trends in the industry:
- The large miners are actively divesting non-core assets, trying to focus management attention and funding on the large operations and development projects.
- Many companies are having trouble securing the funds required to execute the enormous development projects that are currently in execution phase in the iron ore industry. Forming partnerships and selling minority stakes is often the cheapest way to obtain funding.
- The loss reported by Bumi Resouces is not a sign of mismanagement, but rather a sign of cleaning up the books and trying to make sure the assets listed are actually worth what they are listed for. Valuation of options is a highly subjective art, and the management of Bumi Resources apparently chose to take the revaluation hit at a moment when low coal prices were forces the results into the red anyway.
2013 | Wilfred Visser | thebusinessofmining.com
Mining Week 44/’11: Exchange rate and steel headwinds
Top Stories of the Week:
- Peabody and ArcelorMittal get MacArthur; then ArcelorMittal gets out
- Only 2 days after PEAMcoal, the vehicle set up by Peabody energy and ArcelorMittal to buy Macarthur, announced it obtained a majority interest, Arcelor decided to get out of the combination. The company will sell the 16% of Macarthur it had to Peabody. Peabody had teamed up with ArcelorMittal because an earlier bid had not gained the support of the major shareholders.
- Sources: Reuters; Financial Times; ArcelorMittal press release
- Vale suffers $2.8bln exchange rate hit
- Vale posted disappointing results for the 3rd quarter: the weak Brazilian real compared to the US dollar hit the company hard, iron ore spot prices dropped 27% q-on-q, and production volumes were lower than planned.
- Sources: Vale press release; Financial Times; Wall Street Journal
Trends & Implications:
- The move of ArcelorMittal out of the Macarthur acquisition is a surprising sign of hesitance and uncertainty about the development of the global steel market. The company prefers cashing $700mln over having to pay an additional $1.2bln to get 40% of the Australian coal miner. It still plans to build an iron and coal mining business to increase self-sufficiency. US steelmakers are also struggling and iron ores prices have plummeted in expectation of falling steel demand.
- Exchange rates remain a very important factor in the competitiveness of miners because sales for miners around the world are typically in US dollars, irrespective of the currency in which costs are incurred. As shown in the exchange rate graphs below the Brazilian real has been hit harder than the Australian dollar, key currency for iron ore production of Rio Tinto and BHP Billiton, in the past quarter.
©2011 | Wilfred Visser | thebusinessofmining.com
Xstrata retains leadership in Dow Jones Sustainability Index
“The main sustainability issue facing the mining industry is that of declining ore grades, which implies that over time, more mineral ore needs to be extracted and processed in order to produce the same amount of metal. This is likely to exacerbate many of the environmental and social issues facing the mining & metals industry going forward. Some of the prominent environmental issues include mineral waste management, as well as the management of key inputs such as energy and water. Social issues are mainly centered around the health & safety of workers and general labor conditions. Issues such as land rights, population relocations, the use of private security forces to protect mining assets, and mine closure also remain very controversial. As with other extractive industries, the mining space is particularly susceptible to corruption, bribery and other breaches of the Codes of Conduct”
Source: Dow Jones Sustainability Index Review 2011, September 2011
Observations:
- Xstrata tops the Dow Jones Sustainability Index for the basic resources sector for the second year in a row.
- Most important changes of the index for the mining industry are the inclusion of Newcrest and Kinross, and the removal from the index of ArcelorMittal and Goldcorp.
- Assessment criteria include economic, environmental, and social topics. Full list of criteria can be found here.
Implications:
- Inclusion in the DJSI is mainly a marketing issue; it does not have direct operational or financial consequences. Many countries do require foreign investors to adhere to global reporting initiatives to ensure a certain level of sustainability, but DSJI requires a much broader set of policies.
- Xstrata especially scores higher than industry average in terms of climate strategy, mineral waste management, human capital development, and standards for suppliers. The benchmark report will certainly be used by some companies to prioritize areas for improvement.
©2011 | Wilfred Visser | thebusinessofmining.com
Anglo American eyes Macarthur coal
“Anglo American is considering a counterbid for Macarthur Coal in an attempt to gatecrash a A$4.7bn (US$4.9bn) bid for the Australian coal group from Peabody Energy and ArcelorMittal. Earlier this month, Macarthur said it was open to offers that valued its business at nearly A$5bn after formally rejecting an ‘opportunistic’ bid from Peabody Energy of the US and steelmaker ArcelorMittal.
People familiar with the bid process said there were a number of interested parties, one of which was Anglo American. The mining group is said to be working with its traditional advisers, which include Goldman Sachs.
It is not clear whether Anglo will proceed with any offer, and talks are expected to come to a head in the next week. A deal would be the largest by Anglo since 2007, with its recent blooming profits creating a degree of financial flexibility that the company has not enjoyed for several years.”
Source: Financial Times, August 21 2011
Observations:
- Peabody and ArcelorMittal have made an offer to the shareholders of Macarthur after Macarthur’s board declined to agree to the offer and not search for higher bidders.
- Anglo’s metallurgical coal operations are currently mainly located in Queensland, giving a good geographical match with Macarthur’s operations.
Implications:
- The current stake of ArcelorMittal in Macarthur will be an important hinderance for other parties to make a counterbid. If their bid would succeed, they would still be left with ArcelorMittal as an important party in the board room.
- Potential other parties interested in buying Macarthur could be Chinese steel makers and/or coal miners, other large coal producers in Australia (Rio Tinto, BMA), government backed Indian coal miners, or even Vallar/Bumi. Based on the proximity to existing operations Anglo would be able to justify a higher premium than new entrants in the Queensland coal industry.
©2011 | Wilfred Visser | thebusinessofmining.com
Peabody, ArcelorMittal Sweeten Offer for Macarthur
“The world’s largest private-sector coal miner and the largest steelmaker by output on Thursday sweetened their offer for Australian pulverized coal miner Macarthur Coal Ltd. to around A$4.73 billion (US$5.05 billion), while moving a step closer to success by agreeing to start due diligence on the deal. Peabody Energy Corp. and ArcelorMittal said Monday they would start receiving data and site access from Macarthur from the coming Monday.
St. Louis-based Peabody and Luxembourg-based ArcelorMittal made an indicative A$15.50 per share bid for Macarthur, the world’s largest miner of pulverized steelmaking coal, according to the announcement Monday.”
Source: Wall Street Journal, July 14 2011
Observations:
- Peabody tried to buy Macarthur early 2010, but this offer did not convince the 3 major shareholders (ArcelorMittal, Posco and Citic). In the new offer, announced last week, Peabody teams up with ArcelorMittal in a 60%/40% ownership structure.
- The sweetening of the offer consists of the withdrawal of the demand that a $0.16/share dividend not be paid out by Macarthur. In turn the buyers get access to the due diligence information required to test the offer assumptions and to prepare integration.
Implications:
- It appears Macarthur’s board is cooperative in the deal, opening books and mines for inspection in exchange for a small increase in value for current shareholders (approx. 1% of market value).
- If the deal goes ahead the major shareholders that don’t participate in the takeover will need to decide whether or not to sell their shares. Posco and Citic both are strategic shareholders, but only Posco has interest in retaining access to Macarthur’s products, which will potentially become much more difficult if competing ArcelorMittal increases its ownership stake.
©2011 | Wilfred Visser | thebusinessofmining.com
ArcelorMittal sweetens offer for Baffinland
“ArcelorMittal has again sweetened its friendly offer for Baffinland Iron Mines in an escalating battle for control of one of the world’s biggest undeveloped iron ore deposits in Canada’s high Arctic. The Luxembourg-based steelmaker said on Friday that it was offering C$1.40 for each Baffinland share, valuing the company at C$551m. Gaining control of the deposit would enhance ArcelorMittal’s access to a key raw material at a time of growing competition for such resources.
Its bid equals the latest offer by a group backed by Energy and Minerals Group (EMG), a US private-equity firm. However, ArcelorMittal is bidding for all Baffinland’s shares while EMG would buy only 60 per cent.”
Source: Financial Times, December 31 2010
Observations:
- ArcelorMittal aims to be 75% self-sufficient in iron ore supplies, up from 46% in 2007.
- ArcelorMittal Mines Canada already operates two large open-pit mines: Mont-Wright and Fire Lake. The experience with arctic mining gained here will help to operate the Baffinland mines.
Implications:
- ArcelorMittal reckons that the shareholders will prefer to sell the shares at the current premium instead of holding on to the shares with EMG holding 60% of the shares, which would reduce liquidity of the trade.
- If the company wants to obtain full ownership of Baffinland, it will have to convince EMG to sell its 10% stake. As EMG is looking for full control over the company too, it is likely to give up its stake if ArcelorMittal wins the bidding war.
©2011 | Wilfred Visser | thebusinessofmining.com
Doubts on Coal India’s coal reserves
“Coal India is set to begin a roadshow to promote what is expected to be India’s biggest stock listing, even as tightened environmental regulations and a Maoist insurgency threaten to render much of the state-owned miner’s reserves inaccessible. …
Coal India hopes to raise up to Rs150bn ($3.2bn) from the sale of a 10 per cent stake. That would make its initial public offering bigger than India’s largest completed listing, the $3bn offering of domestic electricity producer Reliance Power in early 2008. Coal India claims to be the world’s largest coal producer and accounts for 85 per cent of production in India, which has the fourth-largest reserves on the globe. But it recently revised down its annual production target from 520m tonnes to 486m tonnes, citing delays in environmental clearance for mine expansion. Meanwhile, Indian coal imports are surging, with KPMG estimating a domestic shortfall of 189m tonnes a year by 2015.”
Source: Financial Times, September 13, 2010
Observations:
- The capital aimed to raise with the proposed IPO is $0.4bln higher than initially targeted. However, the uncertainty caused by changes in legislation have delayed the process by months since the rumours in June.
- Coal India has 471 mines (March 2010) of which 273 are underground, 163 opencast and 35 mixed mines. CIL further operates 18 coal washeries, (12 coking coal and 6 non-coking coal). The many small operations are organized into 8 core geographical business units.
Implications:
- A recent ruling on mining in areas populated by tribal people affected the plans of Vedanta to develop an iron ore mine in the state of Orissa. The Indian government is stepping up its efforts to protect the environment and human rights, changing the way many local mining companies have to operate. The amount of capital Coal India will be able to raise depends on the availability of its reserves in areas protected by these rulings.
- Once a larger part of Coal India is made available to the public, large corporates in the Indian power industry and heavy industry (especially steel: ArcelorMittal, Reliance and Tata) are likely to acquire strategic stakes in the company to secure supplies.
©2010 | Wilfred Visser | thebusinessofmining.com
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