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Posts Tagged ‘Canada’

Mining Week 47/’12: BHP sells diamonds; Anglo pays for iron ore

November 18, 2012 Comments off

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

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Mining Week 33/’12: Coal, copper, iron ore profit drops

August 13, 2012 Comments off

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

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

March 11, 2012 Comments off

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:

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  • 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

January 7, 2012 Comments off

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

October 6, 2011 Comments off

“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

Minmetals in C$1.3bln bid for Canada’s Anvil

October 4, 2011 Comments off

“China’s Minmetals Resources has launched a C$1.3bn (US$1.25bn) takeover offer for Anvil Mining, a Toronto-listed copper producer, in a move that underscores the rising international profile of Chinese mining companies.
Chinese miners have been slowly but steadily advancing their overseas presence, as China’s consumption of key commodities such as copper, gold and coal continues to grow.

Minmetals announced Friday it would offer C$8 per share for Anvil in a friendly deal that has the approval of Anvil’s board and major shareholder, Trafigura Beheer. The price is a 30 per cent premium to Anvil’s 20-day trade-weighted average.”

Source: Financial Times, September 30 2011

Observations:

  • Minmetal’s made a bid for Equinox in April, but withdrew this offer after Barrick offered a higher price.
  • Minmetals acquired many assets of OZ minerals in Australia in 2009. Its mining division MMG is mainly managed by western managers and operates mines in Australia and Laos.
  • Anvil’s most important asset is the Kinsevere copper project in Congo, which is expanding to a 60,000tpa capacity and has proven and probable reserves of approx. 750 thousand tons contained copper.

Implications:

  • Anvil’s board informally put the company up for sale last month although it is in the process of a fully financed expansion program. Analysts expect the move to be driven by the large shareholders that want to cash in on their investment.
  • Minmetals will continue to look for $1-7bln copper investments in Southern Africa, trying to expand its portfolio and potentially build on the experience of Anvil’s management. According to the Economist stability in the Katanga copper region is uncertain as the strong governor of the province has decided to leave the office next year. Congo’s copper assets will certainly be in the center point of attention in the coming year.

©2011 | Wilfred Visser | thebusinessofmining.com

Copper wars: Minmetals in $6.5bn bid for Equinox

April 4, 2011 Comments off

“China’s Minmetals Resources has launched a C$6.3bn (US$6.5bn) unsolicited bid for Equinox Minerals, the Australian-Canadian copper miner which itself is in the throes of seeking to acquire Vancouver-based Lundin Mining. The bid is the largest-ever unsolicited takeover attempt by a Chinese mining company, at a time when China’s miners are increasingly seeking to go abroad.

Minmetals on Sunday night said its all-cash offer of C$7 per share, a 23 per cent premium to Friday’s closing price, was a superior alternative for Equinox shareholders to the Lundin acquisition, offering them ‘certainty of value and timing in realising their investments’.

The bid is conditional on Equinox dropping its offer for Lundin. Andrew Michelmore, Minmetals’ chief executive, said that the Chinese group was only interested in buying Equinox, which he said aligned with Minmetals’ strategy for growth and enhanced its global production portfolio.”

Source: Financial Times, April 4 2011

Observations:

  • Minmetals is the third stage in the developing copper wars for consolidation in the industry. In the first stage Lundin and Inmet proposed a merger of equals named Symterra. In the second stage this merger was derailed by a takeover attempt of Lundin by Equinox.
  • Minmetals is one of the most active Chinese companies in foreign investment, buying most of the assets of Australian OZ Minerals to form Minerals and Metals Group (MMG) in 2009 for $1.4bln. It appears Minerals and Metals Group and Equinox will be combined. MMG is mainly run by western managers.

Implications:

  • For most shareholders the all-cash offer of Minmetals will be preferable to the takeover of Lundin, which would increase the gearing of the company to dangerous levels. Equinox’ management might be able to get a slightly better price from Minmetals, but it is unlikely that the company will stay independent.
  • The announcement of Minmetals comes on the same day the World Copper Conference kicks off in Santiago. Many of the industry’s CEOs are gathered for this event. Also today, Chinalco announced its intention to expand the scope of activities from aluminium to other commodities, including copper. It is unlikely that other state-controlled Chinese companies will come with a competing offer for Equinox, but the meetings around the Copper Conference might trigger other M&A developments in the industry.

©2011 | Wilfred Visser | thebusinessofmining.com

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