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Mining Week 6/’13: Government actions in South Africa and Argentina

February 10, 2013 Comments off

Top Stories:

  • Anglo and government clash in South Africa
    • Anglo announces mine closures resulting in thousands of job losses in its South African operations. In response the president threatened to review Anglo’s mining licenses, trying to force the company to keep the mines open. Mark Cutifani, Anglo’s new CEO, reacted with fierce criticism of the government’s attitude.
    • Mining companies in South Africa see a shift of union membership from the moderate NUM to the more radical Amcu, leading up to further wage negotiations this year.
    • Sources: Financial Times; Reuters; Financial Times 2
  • Vale and government clash in Argentina
    • Vale’s $6bln Rio Colorado potash project in the Mendoza project of Argentina is rumored to be delayed by up to 3 years, mainly driven by large rail investments. Vale announced it is reviewing the project economics and has therefore extended the holiday of the workers, but the company denies the project has been suspended.
    • The governor of the province told media that Vale has asked for delay of a sales tax implementation from construction to extraction phase, and argues that this would imply a tax break of $1.5-2.0bln. He also stressed that the government will make sure the project moves forward irrespective of Vale’s plans.
    • Sources: Vale press release; Financial Times; Mineweb

Trends & Implications:

  • The business environment for mining in South Africa remains very unstable. Not only the government’s ambition to get as much revenue out of mining as possible, resulting in top decile effective taxes, but also the radical approach of unions fighting to increase membership levels, create a situation in which long-term planning for any mining company in the country is almost impossible.
  • The business environment in Argentina has deteriorated quickly and appears to move into the direction of nationalization of business quickly. The government tries to get projects going in an attempt to stimulate the economy, but at the same time makes it impossible for companies to repatriate profits from those projects in an attempt to limit inflation. As a result there is no incentive for any foreign company to invest in the country for any short to mid-term gains. In the Rio Colorado case: A delay of the effect of sales tax to the extraction phase is unlikely to reduce tax paid by Vale by $1.5bln, as the company only starts selling its product in large quantities in that extraction phase.

2013 | Wilfred Visser | thebusinessofmining.com

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Argentina suspends $5.9bln Vale potassium project

June 20, 2011 Comments off

“A $5.9bn potassium project in Argentina has gone into limbo after authorities in Mendoza province suspended development, alleging that Vale, the Brazilian miner, had failed to meet requirements to hire and buy supplies locally. The project, which includes the construction of a railway and a port on Argentina’s Atlantic coast to transport potassium, is still in its initial planning phase. In its first-quarter earnings report, Vale said it had pushed back the planned start of production to the first quarter of 2014 from the second half of 2013.

The company expects the project to have a nominal annual capacity of 2.1m tonnes of potash. A second phase would increase capacity to 4.3m tonnes. The Mendoza government said on its website that the decision had been taken ‘because of insufficient information supplied regarding the plan and the level of investment … The sanction will be lifted when the company complies with the request’.”

Source: Financial Times, June 18 2011

Observations:

  • One of Vale’s strategic priorities is to build a strong potash business. The Argentinian Rio Colorado project, which should start production in 2014 with some 20% of Vale’s current potash production, is key part of this strategy.
  • Argentina’s province of Mendoza is situated in the region del Nuevo Cuyo in the midwest of the country, bordering to Chile. The province has set strict ‘buy local’ and ‘hire local’ regulations in order to stimulate the economy, forcing Vale to hire 75% of total workforce locally.

Implications:

  • Both the provincial government and Vale are very polite in their communication, signalling the importance of the project to both of the parties. The province is using a rather uncertain moment in the development phase of the project to stress the importance of collaboration with local authorities. However, this discussion is not expected to seriously derail the project, unless governmental changes chance the standpoints of the provincial government.
  • In the worst case for Vale issues on development of a port for the same project in a different province will be made part of new negotiations with Mendoza province, indicating involvement of the national government.

©2011 | Wilfred Visser | thebusinessofmining.com

Andean Subject of Gold Major Bidding War

September 3, 2010 Comments off

“One of the world’s most prospective gold companies, Andean Resources Ltd., has become the subject of a bidding war between two Vancouver-based global gold majors. Andean, based in Australia, has rocketed to international industry prominence in the past two years through the rapid development of its high-grade, low-cost Cerro Negro gold project in Argentina.

Goldcorp Inc. and Andean said Friday they had reached an agreement for Goldcorp to acquire all Andean shares through a combination of shares or cash that values Andean at 3.6 billion Canadian dollars (US$3.4 billion). Under this arrangement, each common share of Andean will be exchanged for either 0.14 shares of Goldcorp or a cash payment of C$6.50/share, subject to an aggregate maximum cash consideration of C$1 billion. “

Source: Wall Street Journal, September 3, 2010

Observations:

  • Cerro Negro contains 2.1 million ounces of gold and 20.6 million ounces of silver in probable reserves. At capacity of 285 thousand ounces this will result in a mine life of only 7 years.
  • Average cost of production is projected to be $60 per ounce, resulting in a production margin of over 90%.
  • Goldcorp currently offers $3.4bln, while Eldorado’s offer priced about 2% lower was rejected 2 weeks ago. Eldorado has made a new offer today.

Implications:

  • Goldcorps shares dropped slightly less than Eldorado shares upon the offers, indicating investors believe Goldcorp to be able to achieve more synergies. Although Eldorado is growing fast and building a strong portfolio of assets, the geographic and operational variance between the projects hinders the realization of synergies.
  • The gold business is experiencing a boom and a strong increase in M&A activity due to the high price levels. Exploration costs for gold deposits account for nearly half of the total global exploration costs.

©2010 | Wilfred Visser | thebusinessofmining.com

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