Archive
Mining Week 47/’12: BHP sells diamonds; Anglo pays for iron ore
Top Stories of the Week:
- Harry Winston buys BHP’s diamond business for $500m
- Diamond retailer Harry Winston has decided to buy BHP Billiton’s diamond business for $500m cash. The business consists of 80% of the EKATI diamond mine in Northern Canada and sorting and marketing units.
- Both BHP Billiton and Rio Tinto put their diamond businesses up for sale this year. Rio Tinto might be reconsidering that decision as it couldn’t secure a good price for its Diavik mine and its Indian holdings have come back with good exploration results.
- Sources: BHP Billiton press release; Harry Winston press release; Financial Times
- Anglo’s Minas Rio iron ore project delayed and more expensive
- Anglo American announced that Minas Rio, its 26.5Mtpa iron ore project in Brazil, will not start producing before the second half of 2014. The delay is caused by license issues around construction of power transmission lines.
- Anglo also announced that the total capital cost for the project is “unlikely to be less that $8.0bn”, making this the first major iron ore project which costs more than $300 per millions tonnes capacity.
- Sources: Anglo American press release; Reuters; mining.com
- Qatar’s support appears to seal GlenStrata deal
- The Qatar Sovereign wealth fund has announced it will support Glencore’s offer of 3.2 shares per share for Xstrata, making it very likely that the largest mining deal of the past years will become reality. Xstrata’s shareholders get to vote on Tuesday.
- Qatar, Xstrata’s 2nd largest shareholder after Glencore, also announced it will abstain from voting on the retention incentive package for Xstrata top management, making it very likely that this >$200m retention package will not become reality.
- Sources: Qatar holding; Financial Times 1; Financial Times 2
Trends & Implications:
- Anglo’s issues in Brazil demonstrate the enormous importance of getting power issues for large projects sorted out early. Last month Rio Tinto’s enormous Oyu Tolgoi project in Mongolia was only hinging on a power supply agreement with the Mongolian and Chinese governments. Many projects in developing countries either need to secure power supply from other countries or have to build their own power plants, forcing them to go through tremendous licensing issues and import natural resources to get their operations powered up.
- When the Xstrata retention package is voted down, a big group of top-level executives at Xstrata can be expected to start looking for new jobs quickly, opening up a great pool of talent for other companies. The corporate cultures at Xstrata and Glencore are so different that many miners will have to adjust to the more aggressive, top-down culture of the trading house. Many of the top managers will prefer to find a good job in another mining house instead.
2012 | Wilfred Visser | thebusinessofmining.com
Mining Week 33/’12: Coal, copper, iron ore profit drops
Top Stories of the Week:
- Harry Winston chooses between BHP’s and Rio’s diamond business
- Harry Winston, the diamond retailer that holds a 40% stake in Rio Tinto’s Diavik mine in Northern Canada, is in talks with BHP Billiton to buy the Ekati operation, also in the north of Canada. Both Rio Tinto and BHP are trying to get out of the diamond business as they can’t realize the scale in the industry to make it a core business.
- Titan, part of the Tata group, is rumoured to be interested in an acquisition of Harry Winston and might emerge as a competitor in the consolidation movement in the diamond business with strong financial backing.
- Sources: Wall Street Journal; Financial Times
- Xstrata’s profit drops on prices and volumes
- Xstrata’s operating profit for the first half year dropped by 42%. Approx. half of the drop is attributed to lower commodity prices, the other half mainly to inflation and lower volumes.
- An important message communicated in Xstrata’s earnings presentation is the potential of the company to continue stand-alone in case the share acquisition by Glencore (supported by Xstrata management) fails. Xstrata’s shareholders get to vote on the deal on September 7th.
- Sources: Financial Times 1; Financial Times 1; Xstrata presentation
- Rio Tinto profits down on lower coal and iron ore prices
- Rio Tinto’s operating profit for the first half year dropped by 22%, mainly driven by lower iron ore prices and higher costs caused by lower grades and higher stripping ratios.
- Sources: Wall Street Journal; Rio Tinto presentation; Financial Times
Trends & Implications:
- Xstrata is among the few companies that manages to communicate (or achieve) a unit cost reduction in its earnings presentation, probably the largest driver of positive reception of the quarterly numbers by the investment community. By breaking out the ‘uncontrollable’ inflation part the company communicates it has success in cost cutting, even though nominal costs increased year on year.
- Most large miners are stressing the discipline of their capital investments in the latest presentations they are giving, promising only to invest if a good return can be achieved. The most prominent example of a potential cutback on capital expenditure is BHP’s announcement that it is reviewing the expansion of the outer harbour in Western Australia required to lift iron ore export capacity to the planned level. While trying hard to show the investments are responsible, the companies also try to communicate that ‘the industry fundamentals’ are still solid, mainly using the projected long-term growth of China as explanation. However, Rio Tinto’s updated demand forecast graphs are among the first that show a negative Chinese trend after 2030 (in line with the model presented on this site). Knowing that a large part of current big projects in iron ore and coal are planned to build capacity for more than 20 years these long-term prospects slowly start to make their way into investment decision-making.
©2012 | Wilfred Visser | thebusinessofmining.com
Mining Week 10/’12: Xstrata buys coal, Molycorp goes downstream
Top Stories of the Week:
- Xstrata buys more Canadian coking coal
- Xstrata buys the Sukunka coking coal deposit from Talisman Energy for $500mln in cash. The deposit holds 236 million tonnes measured and indicated resource. The non-producing asset is located in the same region as two other assets bought by Xstrata last year.
- Sources: Xstrata press release; Talisman press release; Financial Times
- Glencore/Xstrata merger debates
- While the merger antitrust investigations for the GlenStrata merger are getting started, the executives of both companies are going on a tour to Xstrata’s major shareholders to get buy-in. Several large shareholders (Standard Life, Schroders) have indicated they will vote against the deal at the current 2.8 shares of Glencore per share of Xstrata valuation.
- Sources: Financial Times; Bloomberg
- Molycorp integrates downstream with $1.3bln takeover
- Molycorp, the largest non-Chinese miner of rare earth minerals, made a takeover bid for Canadian processing company Neo Material Technologies, for $1.2bln. The deal will be paid roughly in roughly 2/3 cash and 1/3 shares. The strategic objective of Molycorp is to become a strong player in processing rare earths into semi-finished goods and to gain a strong foothold in exports to China.
- Sources: Molycorp press release; Wall Street Journal; Financial Times
Trends & Implications:
- The continued investment in iron ore and coal assets by both the major diversified miners and many smaller players is based on a belief that the long term demand for construction materials will increase for several decades driven by two main trends: global population growth (more persons), and resource intensity growth (more material per person). Rio Tinto’s latest iron ore presentation summarizes these two points in the pictures below:
- The large mining companies reiterate these points every in every single investor presentation. Because many investors want to see more cash returned to the shareholdes in relatively uncertain times, the companies have to stress continuously that long term fundamentals look good and that large investments are needed.
©2012 | Wilfred Visser | thebusinessofmining.com
Mining Week 01/’12: New year – Same fear
Top Stories of the Week:
- Alcoa cuts aluminium production in fear of lower demand
- Alcoa announced shutdown of 532,000 tonnes of smelting capacity at the top of the cost curve to lower production costs and improve competitiveness. The 12% reduction of capacity mainly hits operations in the USA.
- Sources: Financial Times; Wall Street Journal; Alcoa news release
- Potashcorp temporarily closes a third mine because of low demand
- After recently temporarily closing down Lanigan and Rocanville mines, PotashCorp now decided to temporarily close Allan mine to because of lack of demand for fertilizer. The combined shutdown of the three mines results in approx. 1 million tonnes of potash, or some 10% of the company’s annual production.
- Sources: Wall Street Journal; PotashCorp Q4 market analysis report; text
- Unions in Canada and Zambia make their case for wage increases
- A union representing copper mine workers in Zambia signaled the foreign miners will have to agree to higher salary increases than the average offer of 11% to prevent widespread strikes. At the same time Rio Tinto Alcan and Caterpillar are taking a strong position against unions in Canada by locking out union workers after expiry of the negotiation periods.
- Sources: Wall Street Journal on Zambia; Wall Street Journal on Canada
Trends & Implications:
-
The mining industry for the last 2 years has been and continues to be gripped by 2 paradoxical fears:
- The fear for slowing demand due to the lack of recovery after the financial crisis – With the financial crisis over 4 years old already the typical macro-economic cycle of 6-9 years has clearly been disrupted. Governments and companies are still operating in ‘crisis fighting’-mode because demand does not pick up like after a regular economic downturn. Large investments are still undertaken because the belief in the long term demand driven by population growth and growth of average GDP/capita is unchanged, but at the same time companies are trying to manage short term lack of demand by scaling down or temporarily closing operations.
- The fear for strikes and civil unrest resulting from struggling individuals facing mining companies that continue to realize high profits – Despite the financial volatility the commodity prices generally have remained high, making mining companies among the few companies in the world that continue to generate high profits. With people around the world facing the economic crisis and feeling its impact, friction develops between the rich companies and the less well off workers and neighbours.
©2012 | Wilfred Visser | thebusinessofmining.com
BHP Billiton and Rio Tinto growing in potash
“Rio Tinto, the Anglo-Australian mining group, is re-entering the potash business through a joint venture with a Russian fertiliser producer which holds extensive exploration permits in the Canadian province of Saskatchewan.
Rio will initially acquire a 40 per cent stake in nine blocks covering an area of 241,000 hectares currently held by North Atlantic Potash, a subsidiary of Russia’s JSC Acron. Under the deal, Rio can eventually raise its stake as high as 80 per cent.”
Source: Financial Times, September 28 2011
“Mining heavyweight BHP Billiton is “aggressively” pursuing potash projects in Saskatchewan along with its Jansen asset, the company said on Wednesday.
“Although these are at an early stage, the data acquired suggests they have the ability to support significant potential developments,” spokesperson Ruban Yogarajah said, adding that the combined properties could “at least” match Jansen’s planned output of eight-million tons a year.
BHP Billiton in June said it approved a further $488-million to develop Jansen, bringing its total investment in the project to $1.2-billion.”
Source: Mining Weekly, September 29 2011
Observations:
- Approx. 33mln tons of potash are mined annually, with Canada accounting for approx. 30% of global production. With price per ton of around $400-$500 the global market totals $13-17bln annually.
- Both BHP Billiton and Rio Tinto are planning to move or expand in the Potash industry. BHP Billiton already is operating in Saskatchewan and tried to make a big move by taking over PotashCorp last year. Rio Tinto sold its potash exploration projects in 2009, but tries to re-enter in a JV with a small Russian player.
Implications:
- The potash market it currently dominated by 2 marketing ‘cartels’: Canpotex (PotashCorp, Mosaic, Agrium) and BPC (Belarusian Potash Company: Silvinit & Uralkali), which control close to three quarters of global sales and typically copy each others pricing agreements with large customers. The rise of the large diversified players in the business (apart from BHP and Rio, Vale is also building its potash business) could break the power of these cartels and might move the market to pricing based more on spot prices.
- From a technology and production standpoint it makes a lot of sense to have diversified mining companies, specialized in running large scale extraction projects, operate potash mines. Only on the marketing and sales side of the business synergies will be hard to realize, but companies like BHP and Rio Tinto have the experience and size required to set up a strong marketing presence.
©2011 | Wilfred Visser | thebusinessofmining.com
Symterra: Inmet, Lundin Merger to Forge Copper Mining Giant
“Inmet Mining Corp.’s planned merger with Lundin Mining Corp. will catapult the combined 9 billion Canadian dollars (US $9.1 billion) miner among the world’s biggest copper producers as demand for the widely used industrial metal shows no signs of easing.
The combined company, to be known as Symterra Corp., will generate annual production of around 500,000 metric tons of copper starting in 2017, up from around an estimated 205,000 metric tons this year, ranking it among world’s top five senior copper producers. Chile’s Antofagasta PLC is the biggest copper producer, with output of more than 600,000 metric tons estimated for this year.
Inmet and Lundin, both based in Toronto, will combine five copper mines in Portugal, Spain, Turkey, Sweden and Finland with two huge copper projects—Inmet’s 80%-owned Cobre Panama operation, one of the world’s largest undeveloped copper projects with a mine life exceeding 30 years, and Lundin’s 24.8% stake in the Tenke Fungurume mine in the Democratic Republic of Congo. The initial phase of that project calls for a 40-year mine.”
Source: Wall Street Journal, January 13 2011
Observations:
- Although both headquartered in Toronto, Lundin and Inmet don’t have operations in North America. Most of the current production takes place in Europe, with focus of production in the future shifting to Asia, Africa and potentially Latin America.
- The market capitalization of both firms is roughly equal at $4.4bln. Inmet has demonstrated a stable performance over the past years with profit margin in the range of 25-50%. Lundin has not been as profitable yet, but has access to the promising Tenke Fungurume project.
Implications:
- The main driver for the merger is combined spending power for the development of Cobre Panama and Fungurume and the dilution of political risk associated with operation in Papua New Guinea and Congo.
- Analysts point to the difference in corporate cultures of the two companies as a potential obstacle for smooth integration. The composition of the new board, with Inmet’s Jochen Tilk as president & CEO, indicates that Inmet’s ‘corporate citizenship’ culture might become dominant.
©2011 | Wilfred Visser | thebusinessofmining.com
Cliffs to buy Canadian iron-ore miner
“In a bid to capture more international markets, U.S.-based mining company Cliffs Natural Resources Inc. said it agreed to buy Canada’s Consolidated Thompson Iron Mines Ltd. for about 4.9 billion Canadian dollars (US$4.95 billion).
The deal, an all-cash offer of C$17.25 a share already approved by Consolidated Thompson’s board, is expected to be completed in the second quarter. If approved, Cliffs, a Cleveland-based coal and iron-ore producer, would add about eight million metric tons of capacity to its existing 40 million metric tons of capacity located in Canada, the U.S., Australia and Brazil.”
Source: Wall Street Journal, January 12 2011
Observations:
- The combined company will have a market capitalization of approx $16bln; Cliffs being 3 times the size of Consolidated Thompson.
- To place the combined capacity of 48mln tons in perspective: BHP Billiton, the 3rd largest iron ore producer, produced 114mln tonnes of iron ore in 2009.
Implications:
- Submission for approval by the Canadian authorities will have to prove the net benefit for Canada under the Investment Canada Act. Although the operational benefits for the mines that are located closely together are easy to point out, Cliffs will have to convince the government that jobs will be secure and tax income for the country will not decrease. The expansion plans for Bloom Lake mine will be helpful in this discussion.
- Cliffs expansion helps to create a significant international player for the USA in the market. As the USA still is a large steel market, a large part of Northern American iron ore is consumed in the States. Cliffs gains access to the customer portfolio of Thompson, including Wuhan Iron & Steel, enabling it to sell iron ore internationally at higher prices.
©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
Top Miner’s M&A History
Gold Miner’s M&A History
