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Posts Tagged ‘base metals’

Mining Week 42/’12: Bakrie vs. Bumi

October 13, 2012 Comments off

Top Stories of the Week:

  • Bakrie proposed to buy Bumi’s assets
    • The Bakrie Group, which owns approx. 24% of Bumi Plc, has an offer to buy Bumi plc’s assets (Berau and Bumi Resources) and leave the London listed miner active in Indonesia behind as a cash shell. The group previously held 48%, but sold 24% to Borneo Lumbung to ease debt issues.
    • Bumi’s share price has dropped 80% versus the high in July 2011 on the back of low coal prices and governance issues.
    • Sources: Financial Times 1; Financial Times 2; Wall Street Journal

    Bumi plc structure: London listed miner owns a stake in Berau coal and Bumi resources.

  • BHP Billiton seeks to cut costs

Trends & Implications:

  • Bakrie’s move to leave Bumi plc could imply the end of the Indonesian coal ambitions of Rothschild’s venture. If Bakrie finds the money to execute the deal, it offers other shareholders an opportunity to limit their losses. Bumi could try to reinvent itself and buy assets in other regions with the cash received for Bumi resources and Berau, but it would start with significantly less cash to acquire companies than in its attempt in 2011.
  • The updated M&A share attractiveness tracker shows a relative leveling of the playing field in terms of mega M&A over the past month. South African listed companies clearly took a major hit, but as the outlook for these companies deteriorated at the same time the shares have not gained much attractiveness from an acquisition standpoint. Fortescue managed to fend of urgent debt issues and saw its share price rise, but it remains one of the more attractive acquisition targets. BHP Billiton lost its position as the best positioned acquirer as outlook for the company deteriorates with the expectation of slowing global demand.(

2012 | Wilfred Visser | thebusinessofmining.com

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Copper Falls as China Moves to Tame Inflation

March 18, 2011 Comments off

“Copper fell on the London Metal Exchange Friday on renewed fears that continued measures to curb inflation in China will ultimately curtail demand for industrial metals. Investors were reacting to a move by the People’s Bank of China to raise the reserve-requirement ratio for banks for the third time this year, by 0.5 percentage point, in a bid to tame inflation. China is the world’s largest consumer of base metals, and attempts to slow inflation could affect development and the demand for metals.

Other base metals, however, were trading higher, supported by a further weakness in the U.S. dollar. Interest in the dollar-denominated metals often rises as the greenback weakens, as it makes them cheaper to other currency holders.”

Source: Wall Street Journal, March 18 2011

Observations:

  • China’s central Bank, the People’s Bank of China, is increasing the reserve ratio for banks in an attempt to make banks hoard more cash and lend less, thus curtailing consumption and inflation. China’s government and banking system are in a continuous struggle to adjust currency rate, interest rates and other financial parameters to stabilize growth around 8-10%.
  • Copper is going through a period of unstable prices as there is a production shortage, many new large scale projects are under development, and high prices trigger a wave of industry consolidation.

Implications:

  • Wall Street Journal’s conclusion that the lower copper price is caused by China’s reserve rate increase might be a bit farfetched, as this increase should have the same effect on other commodities. The increase in the reserve rates does however give a signal that China is still struggling with controlling growth, as discussed in the ‘Red Wave’ industry scenario for the mining industry presented last week.
  • A large part of copper production takes place in areas were the currency is pegged, strongly linked, or correlated to the dollar. As a result the copper price is relatively insensitive to changes in the strength of the dollar.

©2011 | Wilfred Visser | thebusinessofmining.com

Xstrata board and the Glencore merger

March 8, 2011 1 comment

“Mick Davis, Xstrata chief executive, told analysts that for both Glencore and his company to be independently listed was ‘unsustainable in the longer term’. The comments were made in early February at a meeting after Xstrata’s results but came to light on Monday in a research note by Andrew Keen, mining analyst at HSBC, looking at the appointment of Sir John Bond as chairman.”

Glencore, the world’s largest commodity trader, posted a 40 per cent jump in full-year profit yesterday, strengthening its hand for a possible stock market listing that could value it at about $60 billion (£37bn).”

Sources & references:

Observations:

  • Mr. Willy Strothotte, current chairman of both Glencore and Xstrata, will step down from the Xstrata position in May and will be succeeded by Sir John Bond, current chairman of Vodafone.
  • Glencore’s EBITDA for 2010 was $6.2bln, with Net Income 2010 at $3.8bln on revenues of $145bln. Margin is slightly above expectations after Q3 2010.

Implications:

  • The appointment of Sir Bond, aged 70, will mainly be intended to have an experienced director of major listed companies oversee the dynamics of a potential merger of Xstrata and Glencore. Analysts expect mr. Bond to demand strong guarantees for Xstrata in a potential merger. This will potentially force Glencore to perform an IPO prior to merging with Xstrata so that a market value is set.
  • A potential merger of Glencore and Xstrata could produce synergies in 4 ways: financial synergies by combining balance sheets, reducing taxes paid and increasing cash slack; reduction of overhead costs by consolidating corporate departments; increased trading profits by improving production and contract flexibility; and operational efficiencies by combining the project portfolios of the companies.
  • Xstrata is mainly strong in base metal and coal operations. Glencore owns majority stakes in Columbia Falls, Windalco and Alpart aluminium companies in North America; Prodeco and Carbones de Jagua coal in Colombia; various zinc, lead and tin assets in Peru, Bolivia and Argentina; Zinc and aluminium plants in Europe; Kazzinc in Kazakhstan; and several base metal projects in Asia and Australia. Combining these assets would create the most diversified player in base metals and a potential world force in coal mining.

©2011 | Wilfred Visser | thebusinessofmining.com

BHP Billiton: Organic growth enabled by high prices

February 16, 2011 Comments off

“An improving economic backdrop and broader supply constraints continued to support the fundamentals for the majority of BHP Billiton’s core commodities. Stronger realised prices in the December 2010 half year increased. Underlying EBIT by US$8,531 million, net of price linked costs. Industry wide operating and capital cost pressures are, however, being experienced across a range of businesses and BHP Billiton is not immune from that trend. The devaluation of the US dollar and inflationary pressures reduced Underlying EBIT by a combined US$1,415 million.

Operating cash flow of US$12,193 million resulted in the Group ending the December 2010 half year in a net cash position. This balance sheet strength affords BHP Billiton substantial flexibility as it embarks on significant investment in organic growth that is expected to exceed US$80 billion over the five years to the end of the 2015 financial year. Major projects, including those in iron ore and metallurgical coal, are at an advanced stage of the approvals process and should result in a substantial increase in sanctioned project capital expenditure.

Notwithstanding the significant commitment towards growth, BHP Billiton has declared a ten per cent increase in its interim dividend to 46 US cents per share and has announced an expanded US$10 billion capital management program. BHP Billiton will continue to consider both on and off-market execution for the US$10 billion program and, subject to market conditions, expects to largely complete the initiative by the end of the 2011 calendar year.”

Source: BHP Billiton press release, February 16 2011

Observations:

  • The impact of commodity prices on the results for this half year vs. the half year ending December 2009 were: Iron ore +$4.4bln; Base metals +$1.4bln; Metallurgical coal +$1.1bln; All other +$1.7bln.
  • Total investment pipeline for the coming 5 years is approx. $80bln (excl. exploration), half of which will be invested in the iron ore and petroleum business. Especially the budget for pre-feasibility studies (over $20bln) underlines BHP’s ambition to spur organic growth.
  • BHP expects to largely complete a $10bln additional capital management program in 2011, aiming to return a large part of the cash pile of over $16bln to shareholders.

Implications:

  • Revenues and profits have shot up due to price increases. However, just as in the case of Rio Tinto, controllable costs have increased. Extreme weather conditions only partly explain this cost increase. Of the major diversified miners publishing their results this month only Xstrata managed to reduce the controllable costs. Key focus for the large miners in the near future will be to carefully select investments and to keep costs in running operations down.
  • The capital program of $80bln over 5 years and the dividend payout of roughly $5bln a year require the company to have a positive cash flow from operations of some $10-11bln in each half year. At the rate of producing cash in the last 6 months ($12bln for the half year) the company is still building up a reserve that would enable it to make additional acquisitions.

©2011 | Wilfred Visser | thebusinessofmining.com

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