Archive

Posts Tagged ‘Australia’

Mining Week 36/’12: Anglo and Codelco compromise; Glenstrata in doubt

August 31, 2012 Comments off

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

Mining News 22/’12: Codelco CEO change; Australia recruits overseas

May 28, 2012 Comments off

Top Stories of the Week:

  • Codelco’s CEO quits
    • Diego Hernandez, Codelco’s CEO, decided to quit prior to the end of his terms for personal reasons. Conflicts around the level of interference by the board in management of the government-controlled company are mentioned as the reason. CFO Thomas Keller will take over as CEO.
    • The change of CEO comes in a critical period for Codelco as it is in a legal battle with Anglo American about the ‘Sur’ project, in which Codelco claims to have the option to buy a larger part than Anglo wants to sell.
    • Sources: Financial Times; Wall Street Journal; Reuters
  • Australia implements law to make hiring immigrant workers easier
    • Australia’s new Enterprise Migration Agreement (EMA) makes it possible to bring in foreign workers on fixed term contracts for projects with an investment of $2bln or higher and a peak workforce of over 1500 employees.
    • The EMA takes a project-wide labor agreement approach, making it possible to have subcontractors bring in people via the overarching project agreement.
    • Sources: Australian government; Wall Street Journal; Financial Times
  • GlenStrata focuses on retention of Xstrata executives
    • As part of the merger deal with Glencore the Xstrata shareholders will get to vote on a $78mln bonus for Mick Davis to stay on for another 3 years. Other executive directors will be offered retention bonuses too.
    • Sources: Financial Times; Reuters;

Trends & Implications:

  • Australia’s EMA will mainly be used for low skilled construction workers. The shortage of highly skilled planning and engineering employees is unlikely to be resolved as those contracts are typically not fixed-term and not project-specific. The Australian government expects it needs to add 89 thousand short-term workers in the next years. Still the unions, which are very powerful in Australia’s resources sector, are complaining about the Agreement, saying that bringing in workers for overseas will hurt the domestic labor market. A key issue in the flexibility of this market is that many workers are available in the East coast region, but most of the work is available in the remote areas on the West coast.
  • As ‘deal-friendly’ investors have built up a share ownership that makes it likely that Xstrata’s shareholders will vote in favor of the merger with Glencore in the currently proposed 2.8x share proportion, the focus of management activity shifts back to regulatory issues and planning for post-merger activities. A key issue in th successful integration of the companies will be to join the corporate cultures of the trader and the miner. The retention efforts will likely go further than just executive leadership, targeting several hundreds of top management. At the same time the company will have to work on retaining the top traders and top management from Glencore’s side.

©2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 12/’12: Australian tax passed, but BHP warns for demand

March 24, 2012 Comments off

Top Stories of the Week:

  • Australian Minerals Resource Rent Tax finally approved
    • The tax on high profits for Australian iron ore and coal projects which led to a change of premier in the country was finally passed by the parliament last week.
    • Officials from the mineral rich states of Western Australia and Queensland argued that the taxation should be a state arrangement rather than a federal law
    • Many critics expect the MRRT not to bring in the amount of cash the governments expect because of tax management by the largest players and potentially because of lower profit margins as a result of increasing costs.
    • Sources: Economist; Wall Street Journal
  • Mixed signals on China’s iron ore demand
    • In the same week BHP warned that China’s demand for iron ore is slowing down and the Australian state of Western Australia increased its outlook for exports.
    • BHP still is bullish about long term demand in China and does not scale down its investment programs. However, in the short term the company ‘’gives caution” demand might drive down iron ore price to $120/t
    • Sources: Wall Street Journal; BHP Billiton presentation; Financial Times

  • Power struggle for Rusal amidst debt issues
    • A new chairman was appointed to the board of Rusal and his predecessor, mr. Vekselberg, made public that the company was struggling with large debt problems and said it had management problems.
    • Rusal announced that it would write down a large part of the value of its Norilsk stake in an attempt to restructure its balance sheet.
    • Sources: Financial Times 1; Financial Times 2; Lex Video

Trends & Implications:

  • Various of the large Russian miners are trying to diversify both in products and geographic presence. Key problems the companies appear to encounter are a clash of management and corporate governance styles between Russia and western investors and large debt burdens in combination with the need to reinvest most or all of free cash flow to modernize or expand.
  • Australia basically kicked off a wave of mining taxation overhauls in countries around the world. Given the very large output of coal and iron ore operations in the country the implementation of the MRRT will be the most impactful for the overall profitability of the industry. As many of the new tax regimes are based on progressive operating margin scales and operating margins of most companies are decreasing because of cost inflation, it is questionable if the new regimes will result in the income countries are hoping for in the short term.

©2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 02/’12: Temporary & Permanent Cost Increases

January 14, 2012 Comments off

Top Stories of the Week:

  • ENRC settles Congo dispute with First Quantum
    • ENRC agreed to pay $1.25bln to First Quantum to settle the dispute over the Kolwezi Tailings project, the Frontier and Lonshi mines and related exploration interests in DRC. First Quantum was stripped of the rights to these projects by the government, after which ENRC came in and agreed to buy the rights from the government in a move widely criticized in the industry.
    • Sources: ENRC press release; Financial Times; First Quantum press release
  • Coal India agrees to salary costs hike of 25%
    • Coal India, by far the largest miner of energy coal in the country, has agree to a 25% permanent increase of wages. In august of last year the unions demanded a 100% increase to offset increased cost of living and reduce the increasing income gap between management and workers. Investment bankers at the time expected the company to agree to a 15-20% increase. The salary hike results in an increase of operating cost for the company by approx. 10%.
    • Sources: Wall Street Journal; Economic Times
  • Weather in Australia and Brazil drives iron ore price up

    • The closure of the export facilities in Port Hedland because of cyclone Heidi and the cancellation of shipments from Brazil because of heavy rains results in supply pressure in the iron ore market. Heavy rains are expected to continue in the Pilbara region, which supplies close to 40% of seaborne iron ore in the world, in the short term.
    • Sources: Financial Times; Supply Chain Review; Wall Street Journal; Vale Press Release

Trends & Implications:

  • Extreme weather conditions have a big influence on bulk material supply chains in the short term, because stockpiling these materials in amounts large enough to last for several weeks is very costly and thus not a normal practice. Especially the steel industry is hit hard with both iron ore and metallurgical coal having to be shipped in from locations that are often hit by storms. Although the impact on spot prices in the short term can be large, the longer term impact on the miners is quite small. Most contracts allow for some flexibility in when exactly the ore is delivered. As long as the mining operations don’t have to stop, the ore will get to the steel manufacturers as some point.
  • The wage increase expected for Coal India is a good example of the very high cost inflation of mining in developing countries. Whereas the cost increase of contracted services and equipment leasing can be seen as (at least partly) a temporary phenomenon caused by high commodity prices, the cost increase because of increased labor and consumable costs in developing countries causes a more permanent shift of the global cost curves.

©2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 52/’11: Chinese investment welcome in Australia

December 31, 2011 1 comment

Top Stories of the Week:

  • Australia solicits Chinese infrastructure investment
    • The government of Western Australia is trying to speed up the development of port and rail facilities of the Mid West region’s Oakajee port by stripping the Mitsubishi/Murchison combination of exclusive development rights and inviting Chinese parties to step in. 8 of the 14 projects in development in the region have Chinese investors.
    • Sources: Wall Street Journal; Government statement; Murchison Metals statement
  • Yanzhou teams up with Gloucester coal
  • Anglo and Codelco fight for Minas Sur stake
    • Anglo American launched a range of claims in Chilean court trying to prevent Codelco from being awarded the right to buy a full 49% of the Minas Sur assets. The scope of the option for Codelco to buy 49% has been unclear since Anglo sold a 24.5% stake to Mitsubishi. In response to Anglo’s claims Codelco restated its intention to acquire 49% of the full project.
    • Sources: Financial Times 1; Financial Times 2; Anglo American press release

Trends & Implications:

  • As expected Chinese investments have proven to be a key driver of M&A activity in the mining industry in 2011. It is noteworthy that many Chinese firms are using a foreign based subsidiary or team up with a Western firm to do foreign investments. This structure holds 2 main benefits for the Chinese investors: they obtain an experienced western staff with knowledge of the way of doing business in the target countries; and they are viewed much more favorably by regulators when trying to execute deals.
  • The fight of Anglo American and Codelco over Minas Sur appears to become a long term court fight. The longer this court fight stretches, the more inclined Anglo American will be to find a compromising deal, as the uncertainty about the ownership structure will delay all investment decisions for the company in the mining region.

©2011 | Wilfred Visser | thebusinessofmining.com

Mining Week 51/’11: Grasberg back in business

December 18, 2011 Comments off

Top Stories of the Week:

  • Freeport McMoran strikes deal on Grasberg
    • Freeport reached a two year extension of the collective labor agreement at its Indonesian Grasberg mine after a 3-month strike. The new agreement holds a 40% wage increase over 2 years, improved benefits, and the promise to base wage future negotiations on cost of living and competitor benchmarks.
    • Only days after the announcement of the agreement a helicopter transporting Freeport’s workers was shot at close to the mine, wounding one person.
    • Sources: Freeport McMoran press release; Wall Street Journal; Financial Times
  • Further coal consolidation in Australia
    • Less than a year after being put up for sale and then declining all offers made Whitehaven teamed up with Aston Resources to create the largest listed coal mining company in Australia with $5.1bln market value. The deal is structured as a shares only acquisition of Aston by Whitehaven.
    • Sources: Financial Times; Whitehaven merger documentation
  • Anglo reassured in South African court
    • The South African court ruled that the department of mines had no right to grant the mining rights of Sishen iron ore mine in the country to a junior mining company with strong ties to some influential politicians, but that instead the Kumba Iron Ore holds the rights to the mine. Kumba is majority owned by Anglo American.
    • Sources: Anglo American press release; Financial Times; Wall Street Journal

    Trends & Implications:

    • The coal mining industry in Australia is still relatively fragmented, with both the diversified supermajors and many domestic listed and unlisted companies active in the industry. Because the mining districts are much less concentrated than the iron ore or gold districts of the country it is harder to achieve economies of scale that would justify many mergers. The deals taken place are mainly based on transportation and sales negotiation synergies.
    • The Wall Street Journal published a good, readable, article this week describing the developments in the mining industry, signaling the combination of two key drivers this year: declining prices, and increasing costs. The resulting low margins will move the focus of many mining companies in the coming years to cost control. However, the winners of this cycle will be the companies that manage to invest during this period with lower profits to build capacity that will make them benefit from the structural increase in prices that will be caused by the structural price increases in the industry. Clearly not all cost increases are structural: equipment and contractor scarcity is mainly a temporary result of an overheated industry; but cost increases resulting from the move to harder forms of mining will stick.

    ©2011 | Wilfred Visser | thebusinessofmining.com

Mining Week 48/’11: Change in Brazil & Tax in Australia

November 27, 2011 Comments off

Top Stories of the Week:

  • Australia’s Mineral Resource Rent Tax approved by lower house
    • The new 30% tax on profits above A$75mln for coal and iron ore projects has been approved by the lower house and is now only to be approved by the senate. The tax has been debated for approx. 2 years. Initially proposed by Kevin Rudd, the former premier, the regime has been tuned down and now includes arrangements to stimulate and protect investments.
    • Sources: Wall Street Journal; Financial Times; Australian Treasury MRRT explanation
  • Vale appoints new CFO: Tito Martins
    • Tito Martins, Vale’s head of base metals, has been appointed as the new CFO of the company. Several executive management positions changed in the first major move of the new CEO to strengthen control. Mr. Martins was involved in the acquisition of Inco, which turned into Vale’s base metals division which was led by Mr. Ferreira.
    • The change of top management of Vale was started by appointing Murilo Ferreira CEO in the place of Roger Agnelli after the presidential elections in Brazil. One of the reasons of conflict between government and Vale was the building of a fleet of iron ore carriers in Asia rather than domestically. This fleet was in the news this week as Chinese ports are refusing to host them, trying to protect the interest of incumbent shipping lines.
    • Sources: Vale’s press release; Financial Times
  • Rio Tinto bids for uranium explorer

Trends & Implications:

  • The changes at Vale should prepare the company for further changes to the business environment for the major iron ore producers. The introduction of the MRRT mainly hits Rio Tinto and BHP Billiton, but all three majors are figuring out how to react to increasing uncertainty about demand. Asian steel producers are pushing for adaptations to the recently changed pricing mechanisms, moving the pricing system to shorter term contracts. At the same time various Asian players are starting to buy iron ore assets in the price range of hundreds of millions to several billions of dollars; threatening the dominance of incumbents.
  • Rio Tinto is trying to buy into uranium at a moment where industry shares are depressed because of the nuclear disaster in Japan last year. The bid for Hathor signals Rio’s management still believes in the potential of the industry. The company says it accounts for 16% of the world’s uranium production from mines in Australia and Namibia.

©2011 | Wilfred Visser | thebusinessofmining.com

%d bloggers like this: