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Mining Weekly 52/’12: Copper Wars continued, South African taxes

December 24, 2012 Comments off

Top Stories:

  • Copper Wars: First Quantum raises takeover bid for Inmet
    • Almost 2 years after the consolidation in the copper mining industry was accelerated by the proposed merger of Lundin and Inmet, First Quantum is trying to take over Inmet to form a major copper producer. Inmet’s board rejected two earlier, lower bids, and is now facing a $5.1bn takover offer.
    • The proposed Lundin-Inmet (Symterra) merger did not materialize because Equinox made a takeover bid for Lundin, after which Equinox was acquired by Barrick, which ‘won’ a bidding war with Minmetals.
    • In attempts to get the Cobre Panama project funded Inmet earlier this year sold a stream with most of the planned precious metals production to royalty company Franco Nevada for an investment of approx. $1bn.
    • Sources: Wall Street Journal; Financial Times; Newsday

    Copper Wars - Inmet - First Quantum

  • ANC will not nationalize South African mines, but wants to increase taxes
    • The ruling ANC party has turned down a plan to nationalize the mining sector in the country. At the same time the party leaders do call for increased taxes to keep a larger part of the benefits from natural resource extraction in the country. No details on the tax increases have been given yet.
    • Sources: The Globe and Mail; Wall Street Journal; Financial Times

Trends & Implications:

  • The copper industry is in a phase of consolidation because many large development projects are in the hands of relatively small miners who don’t have the funds to develop the large projects on their own. With project pipelines being scrutinized in the light of slowing demand growth, large miners are searching for and buying those projects that are actually going to make it, and small miners with and without good development projects try to team up to combine operating assets with strong development projects.
  • South Africa is already one of the countries with the highest effective tax rates to mining companies in the world, combining a 28% income tax rate with a 10% secondary tax, and adding mining royalties depending on the mineral mined. Further tax increases will make it very unlikely that foreign companies try to enter into the South African mining landscape, but will also make it more attractive for the large South African players to try to expand abroad.

2012 | Wilfred Visser | thebusinessofmining.com

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Mining Week 31/’12: Falling prices, falling profits

July 29, 2012 Comments off

Top Stories of the Week:

  • Vale’s profits down on lower prices
    • Vale reported profits below analyst estimates and 60% down versus the same quarter last year. The benchmark price of iron ore has dropped to $120/wmt, at part with the price floor identified by the company last quarter.
    • After the first quarter Vale reported a 45% drop in year on year profits, driven by both volumes and prices
    • Sources: Vale press release; Financial Times
  • Anglo, Teck, Gold miners down on lower prices
    • Lower commodity prices and rising costs resulted in earnings drops of 55%, 65%, and 35% for Anglo, Teck, and Barrick.
    • Anglo announced delay of its flagship development iron ore project in Brazil, Barrick announced large cost overruns for its Pascua Lama project in Argentina, and Teck recently tuned back on a large copper expansion project in Chile. They are all reviewing the balance between project investments and shareholder returns.
    • Sources: FT on Anglo; FT on Teck; WSJ on Barrick
  • Anglo pays $0.6bn for controlling stake in Mozambique coking coal project
    • In a rare move amidst cancellation of development projects across the industry Anglo made the move to buy 59% of the 1.4Bt Revuboe coal project in Mozambique. The project is a JV with Nippon and Posco and is planning to start production of 6-9Mtpa by September 2013.
    • Sources: Financial Times; Anglo press release

Trends & Implications:

  • Dropping prices + increasing costs = review of development. Most non-agricultural commodity price indices have dropped 20-40% over the past year. Where a year ago the focus of most miners was to bring new projects online as fast as possible, attention has shifted to cost containment and ‘disciplined capital investment’. The focus on building projects is stretching capacity of contractors, making capital and operating costs increase rapidly. As a result the projected returns of projects deteriorate, forcing companies to reconsider their portfolio of development plans.

©2012 | Wilfred Visser | thebusinessofmining.com

African Barrick Says 7 Killed in Mine Invasion

May 23, 2011 2 comments

“U.K.-listed African Barrick Gold said seven people were killed and twelve injured after hundreds of people invaded one if its mines in Northern Tanzania in an attempt to steal gold. African Barrick Gold said the local Tanzanian police were called Monday to protect its North Mara mine from around 800 intruders who entered the site illegally with machetes, rocks and hammers in an attempt to steal ore from the site.

‘A number of intruders sustained gunshot wounds, resulting in seven intruder deaths and 12 injuries,’ the company said. ‘African Barrick Gold sincerely regrets any loss of life or injury on or near its mine site. The company will continue to support the government and the community in their efforts to improve law and order and security in the North Mara region,’ it added.

The gold miner said there was no material impact to operations or production at North Mara. It noted that additional police have been deployed around the area and both the police and the company have started their own separate investigations into the incident.”

Source: Wall Street Journal, May 17 2011

Observations:

  • African Barrick Gold, put on the stock exchange by majority shareholder Barrick Gold in 2010, operates 4 gold mines in Tanzania. The company achieved approx. $1.0bln revenue in 2010 and had net income of $218mln in the same year.
  • North Mara mine is an open pit operation consisting of 4 pits; feasibility study is done to take the mine underground, which would make protection of operations easier. In 2009 the North Mara mine came in the news with a toxic sludge spill.

Implications:

  • The incident in Tanzania draws the attention to the safety risk related with the increasing activity of western mining companies in developing countries. Focus is normally on the political risk of operations in these environments, but especially for producers of precious metals and gemstones the risk of theft should be considered.
  • Though all major mining companies work hard on community development programs around the mine sites, these programs certainly do not serve as fire-proof protection against unrest. Most corporate social responsibility programs are set up for good purposes, but do not target the underlying causes of unrest in the region or of unrest versus the mine.

©2011 | Wilfred Visser | thebusinessofmining.com

Copper wars: Barrick outbids Minmetals for Equinox

April 26, 2011 Comments off

“Barrick Gold Corporation announced today that it has entered into a support agreement with Equinox Minerals Limited for Barrick to acquire, through an all-cash offer, all of the issued and outstanding common shares of Equinox (including the shares represented by Equinox’s CHESS Depositary Interests) by way of a friendly take-over offer. The Offer is for C$8.15 per Equinox share in cash, or a total of approximately C$7.3 billion. The Offer represents a 30% premium based on Equinox’s closing share price on the Toronto Stock Exchange on February 25, 2011 (the last trading day before Equinox announced its intention to make a take-over bid for the common shares of Lundin Mining Corporation). The Offer also represents a 16% premium over the per share price under the offer for Equinox proposed by Minmetals Resources Ltd. on April 3, 2011 (which offer has not yet commenced).”

Source: Barrick Press Release, April 26 2011

Observations:

  • Barrick’s appearance as a white knight is a surprising turn in the copper wars, which started in January when Inmet and Lundin announced plans to merge into Symterra
  • Minmetals dropped its bid for Equinox the day after Barrick’s offer, saying that entering into a bidding war would destruct value for its shareholders.

Implications:

The bid by Barrick has two interesting implications: a continued uncertainty about consolidation in the copper industry; and changing dynamics in the relationship between gold and copper miners.

  • Consolidation in the copper industry: although Minmetals appears not to enter into a bidding war, other offers for Equinox might follow. The incentive to keep Barrick out of the copper industry might trigger players like Freeport-McMoran and Xstrata/Glencore to make an offer. Furthermore the players that started the copper wars, Inmet and Lundin, are available as takeover or merger targets again.
  • Copper vs. Gold dynamics: Barrick’s entrance into the copper arena is a significant change of strategy for the gold miner. Its Chilean copper operations did not account for more than 10% of revenue until now, but the copper output will be doubled by adding Equinox’ capacity. Operational synergies with Equinox’ assets in Zambia and Saudi Arabia will not be achieved, thus the acquisition is purely a move for increased diversification. Other gold miners, sitting on piles of cash, might follow Barrick’s strategy.

©2011 | Wilfred Visser | thebusinessofmining.com

Gold and copper prices push Barrick to record

February 18, 2011 1 comment

“Surging gold and copper prices propelled Barrick Gold to record earnings of almost $900m in the fourth quarter, but the world’s biggest gold producer warned of escalating cost pressures. The Toronto-based company reported lower operating costs last year but Aaron Regent, chief executive, said that inflationary pressures “have become more pronounced” across a broad front, including raw materials, freight and labour. Mr Regent added that demand for these inputs is accelerating as mining projects around the world are brought forward to take advantage of buoyant commodity markets.

In a partial reversal of its aversion to hedging, Barrick said that it had taken advantage of high spot silver prices and attractive option terms to guarantee prices on 15m ounces of silver, which is equal to 10 per cent of Pascua Lama’s output in the five years from 2013 and 2017. The strategy will ensure prices of $20-$55 an ounce.”

Source: Financial Times, February 17 2011

Observations:

  • Barrick took a $4.2bln hit in 2009 to eliminate the hedge book. Net cash inflow in 2010 was $4.8bln, leaving the company with $4bln in cash, of which just over half is planned to be spent on capital expenditure this year.
  • Total cash cost for the production of last year was $457/oz., with Q4 almost $30/oz. higher. Costs are down compared to last year (with low production), but up 32% from 2007 levels.

Implications:

  • The return to hedging gives a signal that Barrick expects the silver price not to rise further. In the ’80s and ’90s Barrick used an extensive gold price hedging strategy, in which the full production of the next 3 years was continuously hedged. With the falling gold prices in this period this was a profitable strategy. In 2003 the company decided to stop hedging to gain exposure to increasing gold prices. However, the open hedges for many years were very costly as gold price never returned to 2003 levels.
  • The cost increase experience by Barrick is in line with increasing cost figures diversified miners announced this week. Controlling operational costs will return to the priority lists in order to protect margins when commodity prices decrease.

©2011 | Wilfred Visser | thebusinessofmining.com

Newcrest Earnings Surge as CEO Steps Down

February 11, 2011 Comments off

“Newcrest Mining Ltd. Chief Executive Ian Smith unexpectedly resigned from the world’s fifth-largest gold miner Friday, as the company said fiscal first-half net profit more than doubled to 437.8 million Australian dollars ($439.4 million) from a year earlier.

Mr. Smith, who took over as head of the company in July 2006, said he was leaving to ‘pursue other areas of personal interest’ and would be handing over to Greg Robinson, the company’s executive director of finance. His resignation surprised many in the market, who had expected to see Mr. Smith enjoy the fruits of his labors after turning the company around and completing the acquisition of smaller rival Lihir Gold Ltd. in September.”

Source: Wall Street Journal, February 10 2011

Observations:

  • Newcrest bought and quickly integrated Lihir last summer in an $8bln deal, almost doubling the production capacity of the company.
  • In the wake of the financial crisis and with the increase of the gold price over the past decade directors of gold miners seem to see a lot of worth in finding CEOs with a solid financial background. Barrick’s Aaron Regent, Newmont’s Richard O’Brien, GoldField’s Nicholas Holland, and Newcrest’s Greg Robinson all held CFO positions prior to being appointed CEO.

Implications:

  • Mr. Smith is mentioned to potentially take a top position at either BHP Billiton or Rio Tinto. However, he denies having any concrete plans for a future executive job at this moment. CEO positions at both Anglo American and Vale might become available in the near future: Anglo’s Cynthia Carroll has completed a successful turnaround of the company, while Vale’s Agnelli sees the term in which he turned the domestic champion into the world’s second largest miner end this May. Vale’s board is likely to either give Agnelli a new term or to appoint another Brazilian CEO to ensure good political ties with the government.
  • Expansion of the current group of diversified miners into gold mining should not be ruled out. As they currently hold minor positions in the precious metals market, this might be one of the fields where large deals are still approved by regulators. However, with current gold prices any deal would be based on very high valuation and closed at a high price.

©2011 | Wilfred Visser | thebusinessofmining.com

Newmont to Buy Gold Miner in $2.32 Billion Deal

February 4, 2011 Comments off

“Newmont Mining Corp. said Thursday it is using a war chest swelled by the rise in gold prices to expand in Nevada through the acquisition of Fronteer Gold Inc. Newmont Mining, the world’s second-largest gold producer after Barrick Gold Corp., will pay 2.3 billion Canadian dollars (US$2.32 billion) in cash for the shares of Fronteer Gold, a Vancouver explorer with three projects in Nevada, including the Long Canyon project that holds a key position on a newly discovered gold deposit.

Newmont Mining will pay $14 a share for Fronteer, a 37% premium to a share’s value before the deal was announced. Fronteer’s board supports the deal, and its shareholders will vote on it in April. If approved, Newmont Mining expects the deal to close that month. If Fronteer shareholders reject the deal for a higher competing offer, the company will pay an C$85 million termination fee.”

Source: Wall Street Journal, February 3 2011

Observations:

  • The termination fee arranged by the Newmont negotiators protects the company from the risk of losses resulting from financial arrangements and deal work in case the deal is not closed. BHP Billiton is reported to have lost over half a billion in its attempt to acquire PotashCorp because of the financial arrangements it had to make to enable the offer.
  • The cash offer does include a special construction in which the Peruvian, Turkish and some Nevada exploration activities are combined in a new company: Pilot Gold. Pilot Gold will be 80% owned by current Fronteer shareholders and will be run by current Fronteer management, basically ensuring a continuation of the exploration company.

Implications:

  • A recent poll on this blog revealed expectations of high activity in M&A in coal mining (38% of respondents) and gold mining (25% or respondents). High coal and gold prices both give the miners in these sectors large war chests and increase the pay-off of synergies and expansion projects.
  • Barrick is not expected to come with a counterbid, and GoldCorp or other gold miners are unlikely to be able to offer a higher cash price.

©2011 | Wilfred Visser | thebusinessofmining.com

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