Archive

Posts Tagged ‘China’

Breaking down BHP Billiton’s iron ore production costs

September 29, 2011 2 comments

BHP Billiton organized a site tour of its Western Australia Iron Ore operations this week, providing valuable information about its production costs:

Source: BHP Billiton Site Tour Presentation, September 27 2011

Observations:

  • BHP positions itself in the cost curve around $39/t CIF. Average iron ore price for the year ended June 2011 was $163/t, resulting in a 76% operating margin.

Implications:

  • Combining the data from the two charts above, BHP’s breakdown of total iron ore costs of $39/t CIF China are as follows:
    • US$9.4/t – Contractors
    • US$7.0/t – Secondary taxes & royalties
    • US$4.3/t – Freight, distribution & demurrage
    • US$3.5/t – Depreciation, depletion & amortization
    • US$3.1/t – Fuel & energy
    • US$2.7/t – Raw materials & consumables
    • US$2.7/t – Labor incl. consultants
    • US$0.4/t – Exploration
    • US$5.9/t – Other

©2011 | Wilfred Visser | thebusinessofmining.com

Zambia’s new president worries miners

September 26, 2011 Comments off

“Mining companies are waiting anxiously as Michael Sata, Zambia’s new president, settles into office, wary that the former opposition leader may put past threats against foreign investors into practice now that he has been elected. Rupiah Banda, the incumbent president’s gracious acceptance of defeat in last week’s vote paves the way for a democratic transition, still something of a rarity in Africa.

But it has also triggered unease among investors in Africa’s biggest copper producer. Any mining policy changes would affect a host of international companies – including Glencore, First Quantum, Barrick Gold and Vale – which were expected to invest billions of dollars in the sector over the next five years. The jitters are caused partly because Mr Sata, 74, and his Patriotic Front are relatively unknown quantities. Mr Sata has gained a reputation for populist attacks against investors and complaints that Zambia’s resource wealth has not been adequately distributed.”

Source: Financial Times, September 25 2011

Observations:

  • Some of the largest mining operations and prospects in Zambia are Barrick/Equinox’ Lumwana copper projects; Metorex Chibulama copper mine; Vale’s Konkola north copper project; CNMM Muliashi copper mine; and Collum coal mine.
  • Tensions against foreign, and especially Chinese, ownership of mines rose after two Chinese mine managers allegedly shot a group of protesting miners at Collum coal mine last year.

Implications:

  • It is likely that the new government will try to increase taxes to make the state benefit more from high copper prices. Additionally regulation of working conditions might be strengthened, as much of the unrest in the country’s sector was driven by dissatisfaction about labor rights.

©2011 | Wilfred Visser | thebusinessofmining.com

Coal’s Glow Attracts Major Miners

September 12, 2011 1 comment

“The sector’s confidence in emerging market demand for coal, especially the sort used in steel making, is keeping deal activity brisk. Four of the 10 largest mining-sector mergers and acquisitions in the first half of this year were for metallurgical coal assets, according to PwC. Total deal value so far this year, at nearly $19 billion, is already close to last year’s $22 billion total. Peabody Energy and ArcelorMittal’s $5 billion agreed bid for Macarthur Coal late last month is unlikely to be the last transaction. Anglo American, which was in the running for Macarthur, remains on the prowl for acquisitions, as do other mining majors.

But strong demand and a scarcity of top-notch coal assets can lead to punchy valuations. Acquirers this year have paid 13.2 times trailing operating profit for coal companies, compared with an 11.2 times average over the previous decade, according to IHS Herold. Peabody and ArcelorMittal are paying 20.8 times trailing operating profit for Macarthur.”

Source: Wall Street Journal, September 9 2011

Observations:

  • Top coal mining deals of the last year include Peabody-Arcelor’s (PEAMcoal) $5.2bln bid for Macarthur, Itochu’s $1.5bln Drummond deal, Alpha Natural Resources $8.5bln acquisition of Massey, and Arch Coal’s $3.4bln acquisition of International Coal.
  • In a poll on this site in January 38% of respondents indicated coal would be the commodity triggering most M&A in 2011.

Implications:

  • The key drivers for high valuations of coal producers in the last year are consolidation of the North American industry and the ‘need’ for steelmakers to integrate vertically and secure the access to a stable supply. A similar trend could drive up valuations of iron ore mines if growth of demand keeps up and ramp up of capacity of the major miners goes as slow as expected.
  • Most of the recent acquisitions in the coal sector have been done by Indian steelmakers or US coal miners, with targets often in Indonesia, Australia and Southern Africa (all relatively close to Asian consumers). Surprisingly Chinese companies are not yet playing an important role. Strategic acquisitions by Chinese steelmakers and/or coal mining giants, supported by government institutions, could further drive up valuation ratios of metallurgical coal assets in the area.

©2011 | Wilfred Visser | thebusinessofmining.com

Chinese Consortium Buying Stake in Brazilian Miner

September 5, 2011 1 comment

“A consortium of five state-owned Chinese companies bought a 15% stake in the world’s largest niobium producer for US$1.95 billion in cash, a move that highlights the race among steelmakers to secure resources amid tightening supply.

Brazil’s Companhia Brasileira de Metalurgia e Mineração, known as CBMM, announced the deal on Friday. The company produces more than 80% of the world’s supply of niobium, which is used to strengthen steel and is widely employed in making cars and natural-gas pipelines.

China, whose steelmaking capacity has recently leapt to over 700 million metric tons a year, is the world’s biggest importer of niobium. Growth in emerging markets has underpinned demand for scarce commodities. World-wide demand for niobium grew 10% annually from 2002 through 2009.”

Source: Wall Street Journal, September 2 2011

Observations:

  • The group of 5 existing clients of CBMM buys 15% of the controlling stake of the Moreira Salles family. The family sold another 15% to a group of Japanese and Korean companies for $1.8bln in March.
  • Niobium is considered a rare earth mineral. Various governments tried to stimulate domestic mining of rare earths because China currently holds over 90% of global rare earth production. In May the new Brazilian government persuaded Vale to look into rare earth production.

Implications:

  • It is not fully clear why the Moreira Salles family sells minority stakes of their company. The almost $4bln the family raised by selling 30% is owned by the family, not by the company, and thus will not be used for expansion of the company. As the family held 55% of the company before this year (the other 45% is held by Unocal), ownership is now fragmented, with 2 or 3 of the shareholder groups required to support any major decision.
  • CBMM is well positioned to be the world’s leading niobium producer in the coming decades, as most of the world’s reserves are located in Brazil. Strengthening ties with this producer is crucial for steel makers in order to control their input prices. It will be a challenge for the large Indian and European steel makers to secure their niobium supplies without buying into a producer too.

©2011 | Wilfred Visser | thebusinessofmining.com

China intensifies purchases of copper

September 1, 2011 Comments off

“Chinese companies and investors are stepping up their purchases of industrial commodities such as copper, in a show of confidence in the global economy that stands in contrast to the turmoil in western markets. The wave of buying is providing support for metals and minerals prices after commodities prices fell this month at worries about a double-dip. Senior executives at trading houses, mining companies and banks said Chinese consumers had used the recent drop in prices to rebuild stocks.

‘China is significantly less pessimistic relative to people in the western world,’ said Raymond Key, head of metals trading at Deutsche Bank. ‘On dips they are restocking, especially in copper.’ An executive at an important Chinese trading house added: ‘There is no doubt some traders have been buying [copper] recently.’”

Source: Financial Times, August 30 2011

Observations:

  • The global copper trade is transparent because of the unknown size of stocks at various points in the process, as indicated below. Especially the size of ‘bonded warehouse stocks’, which are often controlled by governments, can only be estimated.
  • Traders estimate the size of the government controlled bonded warehouse stocks to have halved over the past months, leading to a high demand for copper as stock have to be rebuilt.

Implications:

  • The copper trading chain shows the effect of the bull whip syndrome: small changes at the end of the chain result in large impact at the start because each player tries to anticipate the next moves. Copper price decreased as consumers were reducing stocks, trying to avoid buying on the top of the market. At the same time players all along the chain try to reduce stocks and inventory to minimize working capital. As soon as shortage of stocks forces consumers to start buying, prices shoot up because of a lack of reserves along the chain.
  • The Chinese State Reserve Bureau (SRB) holds large stocks in bonded warehouses, but it is unknown how large these stocks really are. The SRB can use these stocks to influence global prices and at the same time the metal stocks are used as a means to reduce holdings of foreign currencies by buying physical stocks. Overall the controlled stocks should be expected to reduce spikes in demand and supply, as a relatively stable copper price is important for China’s manufacturing industry.

©2011 | Wilfred Visser | thebusinessofmining.com

Iron ore to stay above $150, says Vale

July 12, 2011 Comments off

“The price of iron ore will remain above $150 a tonne for at least the next five years, according to Vale, the top miner of the ­commodity. The bullish prediction by Guilherme Cavalcanti, finance director of the mining group, is the latest contribution to a debate on the outlook for the iron ore market that has polarised analysts and investors.

Used to make steel, iron ore is the largest contributor to the profitability for the three largest mining groups: BHP Billiton, Vale, and Rio Tinto. And if Vale’s forecast is correct, the three companies’ shares would be expected to rise sharply.

Asked how long he expected prices to remain above $150 a tonne, Mr Cavalcanti said ‘at least the next five years’, arguing that miners would struggle to meet booming Asian demand. His prediction, in a video interview with the Financial Times, runs against consensus thinking.”

Source: Financial Times, July 6 2011

Observations:

  • Vale’s finance director explains he is not concerned about high inflation in China as mainly the consumer goods price inflation is high, while construction activity still ensures full offtake of Vale’s production.
  • Commodity swaps indicate the market expects prices to decline steadily over the coming years.

Implications:

  • While Vale expects Asian demand for iron ore to stay strong, the companies mainly sees restrained production because of delayed development projects (often because of environmental permitting issues) and weather influences as the key driver for high prices. Together with the high inflation in equipment costs and the relatively weak dollar iron ore prices will for a prolonged time be very elastic to supply.
  • Vale’s share price is lagging behind the price of its main competitors over the past years, resulting in higher cost of debt and reduced ability to perform share based M&A. With Vale’s large exposure to the iron ore price the company would benefit strongly from higher iron ore price expectations in the market.

©2011 | Wilfred Visser | thebusinessofmining.com

Top 10 Priorities of Vale’s new CEO Murilo Ferreira

June 22, 2011 Comments off

Murilo Ferreira

The world’s second largest mining company has changed the man at the top. Roger Agnelli, who led the company for almost 10 years, was replaced by Murilo Ferreira last month. Though Agnelli grew the company into a global force in the industry, he did not manage to please the Brazilian government sufficiently. As a result the new president, Dilma Rousseff, pushed for a change. What is on top of the “To Do”-list for the new CEO?

An analysis of Vale’s latest annual and financial reports, the press conference to introduce the new CEO, investor presentations, and the news about the company in the latest months yields a list of 10 issues that are likely to be at the top of Ferreira’s list of priorities.

The list holds strategic, operational, financial and relational activities, each of which are scored in terms of importance and urgency. Priority 1 on the list is to build strong government relationships; priority 10 is to expand the metallurgical coal business in Latin America. Read on for the full list of priorities. For those readers working with Vale: don’t hesitate to forward the list to mr. Ferreira.

1. Build government relationships

Mr. Agnelli grew the company, but he did not manage to please the Brazilian government. The government controls the majority of the voting shares, and hopes to use Vale as a means to stimulate the domestic economy. The key task for mr. Ferreira will be to build strong government relationships without giving in to government requests which would hurt general shareholder value.

2. Develop strategic messages

A first step for each CEO after taking office is to get the key messages to be repeated over and over again to investors and employees. Especially Vale’s communication to the investor world has historically been poor. Selecting the key points to tell to the world the coming year(s) and tuning the communication and communication support is an important task during these first months.

3. Discuss tax & royalty claims

Related to the first point of building government relationships: the government claims a total of $16.0bln tax over the period 1996 to 2008 plus some $4.7bln in royalties (CFEM). Furthermore, Vale’s current effective tax rate is some 10% below official tax rate because of various tax incentives, for which the continuation is not sure. Reaching agreement with the authorities about these claims and the future tax incentives is crucial for the share price to increase.

4. Build global culture, integrate & decentralize

One of the key points mentioned in mr. Ferreira’s first press conference as CEO was the change of the company style towards a more decentralized system in which team work is incentivized more. Next to driving execution mr. Ferreira will need to be the living example of a global cultural change, in which each part of the business feels equally valuable.

5. Manage vertical integration in Brazilian steelmaking

The next (potential) issue with the Brazilian government is Vale’s role in the Brazilian steelmaking industry. The government wants to create a strong vertically integrated player, and therefore needs Vale to cooperate with players like Gerdau and Usiminas. Although it is in Vale’s best interest to stimulate domestic demand for iron ore to offset the disadvantage in transportation costs to supply the Asian market versus Australian mines, the company wants to stay a pure miner. Developing and discussing strategic options for the domestic industry will be an important task for mr. Ferreira to demonstrate his leadership.

6. Solve roadblocks for development execution

Vale plans to invest $17.5bln in new project development this year, but various projects run the risk of delay. Most roadblocks have to do with demands by federal and regional governments (e.g. the temporary suspension of the Rio Colorado project in Argentina), signalling the requirement to more proactively involve governments in planning procedures.

7. Manage operating cost pressures

A key competitive advantage to Vale is the low cost base of its operations in Brazil. The risk of lower iron ore prices forces mr. Ferreira to try to keep costs down at a time of cost inflation. Especially the management of the energy matrix (energy costs account for over 15% of COGS) and of outsourced services, which are sensitive to Brazilian wage inflation, will require management attention.

8. Compete for position in China

A key task for any big mining firm this decade is to fight for pole position in supplying the number one growth market: China. Mr. Agnelli secured various lucrative supply deals, but Vale did not yet sign significant partnerships. Mr. Ferreira has limited experience with the Chinese market and will thus need to spend time on getting to know the key players and developing relationships which are important for both future development and future supply contracts.

9. Transform internationalization organization

Vale still is a very much Brazilian company: out of the 120 thousand workers (incl. 40% contractors) 80% is located in Brazil. However, this Brazilian focus is starting to hinder the company in attracting international investors, customers, and employees. Even press conference in which new CEO was presented was conducted in Portuguese, certainly posing an obstacle to some investors. Appointing CEO with experience of working in North America is step in the right direction, but mr. Ferreira will need to do more to improve the international image of his company.

10. Build metallurgical coal business in Latin America

Partly driven by the need to diversify the company’s revenue base (68% of revenue still comes from iron ore & pellets, with an even higher percentage when looking at profits), partly driven by the need to build the domestic steel industry, Vale needs to gain access to metallurgical coal close to home. The company operates thermal coal mines in Brazil, but metallurgical coals needs to be imported. Exploration in Colombia is promising, but more needs to be done to build the coal business.

Sources: Vale annual report 2010, Vale CEO press conference May 2011, Vale investor presentation February 2011

©2011 | Wilfred Visser | thebusinessofmining.com

%d bloggers like this: