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Posts Tagged ‘coal’

Mining Week 45/’12: PotashCorp and Rothschild on the offensive

November 4, 2012 Comments off

Top Stories of the Week:

  • PotashCorp in talks to acquire ICL for $14bn
    • PotashCorp, the Canadian phosphate miner that was subject of a $39bn takeover attempt by BHP Billiton in 2010, is in talks with the Israeli government to acquire Israel Chemicals (ICL) and merge it with its own operations. PotashCorp already holds a 14% stake of ICL. The remaining share is worth roughly $14bn.
    • In an initial reaction the Israeli government, which holds a golden share in ICL’s mother company, indicated that the sale of ICL to PotashCorp would not be in the best interest of the country. In a later statement the government did indicate it would be open to a formal bid.
    • Sources: Wall Street Journal; BusinessWeek; Fox Business
  • Rothschild aims to increase Berau interest
    • In response to Bakrie’s proposal to buy out Bumi plc, Nathan Rothschild, the company’s founder, is said to look for partners to make a counterbid for Berau’s Indonesian coal assets.
    • Bumi Resources and Berau are the two key asset groups of Bumi plc, the result of a deal between Vallar plc and Bumi. Following falling call prices minority shareholder Bakrie has proposed a deal in which it would buy Bumi plc’s assets and thus separate Rothschilds and Bakrie’s interests.
    • Sources: Wall Street Journal; Financial Times; Bloomberg

Trends & Implications:

  • The Israeli response that selling ICL would not be in the country’s interest might be preliminary. Although 60% of ICL’s mining activity takes place in Israel, centered around the Dead See, it is unlikely that PotashCorp would want to tune down those activities. Only a very small part of ICL’s production is actually sold in Israel, and those products could be seen as global commodities, making it hard for the government to justify a case in which a sale would be rejected based on national security. The issue that PotashCorp and Israel will need to figure out is how much overhead jobs to leave in the country and/or how to compensate for the potential loss of jobs in office activity (similar to the negotiations undertaken by BHP Billiton with the Canadian government when trying to acquire PotashCorp).
  • Rothschild’s attempt to find new partners to continue his Indonesian activities with Berau does not seem te be a step that is in the interest of shareholders. Entering in a bidding contest with Bakrie for the assets it already controls is not going to improve the financial position of a company plagued by dropping commodity prices. If Bakrie actually manages to secure the funds required to execute the buy-out proposal it is likely that Rothschild will be able to find other, less politically sensitive, cheaper assets to work with. Whatever the result of this power struggle, it appears that Bakrie and Rothschild will not continue to own stakes of the same company.

2012 | Wilfred Visser | thebusinessofmining.com

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

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

Mining Week 29/’12: Chilean peace talks

July 15, 2012 Comments off

Top Stories of the Week:

  • Anglo American and Codelco extend talks about Sur
    • Anglo American and Codelco agreed to suspend legal action in the lawsuits filed by both parties in the conflict around ownership of the Anglo Sur projects in Chile until August 24 to have more time to try to settle the dispute out of court.
    • Chilean media reported that a potential solution to the dispute might involve minority shareholder Mitsubishi to give up a small stake to enable Mitsui to build up a stake. Anglo sold 49% of the project at a high valuation after Mitsui and Codelco made agreements about a deal based on Codelco’s option to buy into the project.
    • Sources: Financial Times; Wall Street Journal; Anglo American press release
  • Agnelli heads new mining consortium in Brazil
    • Vale’s former CEO Roger Agnelli will head a new mining venture set up by investment bank BTG. Initial capital of the new venture: B&A Mineração.
    • The new company inherits a stake in a potash project in Brazil and a copper project in Chile and will look into further opportunities in Latin America and Africa.
    • Sources: Wall Street Journal; Financial Times
  • Tinkler continues with Whitehaven bid
    • Whitehaven, one of Australia’s largest coal miners with mines in Queensland, received a buyout proposal by its largest shareholder: Nathan Tinkler.
    • Tinkler already owns 21.6% of the shares and proposes to buy the rest of the shares at a 50% premium to take the company off the stock exchange. Total bid amounts to approx. A$5.2 billion.
    • Sources: Financial Times; The Australian

Trends & Implications:

  • The peace talks between Anglo, Codelco, Mitsui and Mitsubishi underline a trend of the growing importance of alliances and multilateral networks in the industry. As mining projects more and more take place in relatively unstable areas of the world an important mining projects require investments so big that it can hardly be carried by a single company, companies need to build upon the strengths and contacts of other companies and find win-win agreements with governments to successfully develop their projects.
  • B&A Mineracao is the 2nd high-profile mining startup in recent years, after Nathan Rothschild started Vallar 2 years ago. The initial success and quick issues of Vallar’s tie-up with Bumi demonstrated three important lessons for these startups that plan to be big soon: Firstly a powerful financier that can chip in multi-billion investments is needed to gain any importance; secondly a combination with existing producers is the only way in which the growth can be quick; and finally effective ownership and governance arrangements around these alliances are crucial to make the new management successful.

©2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 25/’12: Whitehaven buyout options; Mine 2012

June 17, 2012 Comments off

Top Stories of the Week:

  • Whitehaven rejects initial offer from largest shareholder
    • Tinkler, largest shareholder of Whitehaven with over 20% of shares, is trying to arrange financing to buy the full group. An initial approach was rejected by Whitehaven as financing of the bid was not deemed solid.
    • Whitehaven became Australia’s largest listed coal group last year after taking over Ashton. Share price dropped approx. 30% over the past 2 months, making the company an attractive buyout target
    • Sources: Wall Street Journal; Financial Times; Reuters
  • PWC launches ‘Mine 2012’
    • Consultancy PWC recently published its annual study on the key industry trends in the mining industry, focusing on the 40 largest mining companies. This year’s report is titled ‘the growing disconnect’, zooming in on the paradox between the need to build new projects to increase supply and the reluctance by shareholders to have their companies commit funds to investment.

Record historical results, high commodity prices, and a bullish outlook shared by many miners continues to underline the industry’s strong fundamentals. But investors’ reluctance to emerge and support growth plans points to a growing disconnect between the market and the mining industry.

Source: PWC

Trends & Implications:

  • PWC identifies the following key trends in their report:
    1. Increased volatility is here to stay
    2. Long-term demand fundamentals remain robust …
    3. … but supply will be the industry’s real challenge going forward
    4. Structural changes to the cost base
    5. Changing fiscal regimes and resource nationalism
    6. Capital expenditure requirements
    7. Can’t bring it on fast enough
  • The report presents the numbers around investment and use of cash for the Top 40 mining companies: $98 billion was invested in capital projects in 2011 and plan for a further $140 billion for 2012. At the same time share prices have decreased across the line. PWC argues 2011 marks the start of the growing disconnect.

©2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 24/’12: Steam coal world is changing

June 11, 2012 Comments off

Top Stories of the Week:

  • Indonesian and US supply drives coal prices lower
    • A surge of exports of thermal coal (used for power generation) from Indonesia and the increasing exports from the USA caused by domestic replacement of coal demand by gas demand are driving thermal coal prices to the lowest point in 2 years.
    • Continued low sales prices are causing various coal miners to get close to financial distress. As their share prices have decreased too, analysts expect a new wave of acquisitions in the industry.
    • Sources: Financial Times; Seeking Alpha
  • Alpha closes steam coal mines in USA
    • Alpha Natural Resources, the company that recently bought Massey for $8.5bln, is reducing steam coal production and cutting approx. 150 jobs by closing 4 small mines in Kentucky and offices in 4 US cities, aiming to reduce G&A by 50-60$mln/year.
    • The company mentions low coal prices and new regulations for coal-fired power plants as the key reasons that the mines have become uneconomical and are unlikely to return to making a profit.
    • Sources: Alpha Natural Resources news release; Wall Street Journal; Reuters
  • Xstrata reveals GlenStrata organization structure

    • The organization structure revealed in the merger documentation supporting Glencore’s bid for Xstrata shows a merger of the organization with very little initial integration. The heads of marketing of the business units continue to report to Glasenberg, and the heads of the asset groups continue to report to Davis.
    • Glasenberg agreed to not using his significant share of voting power to force any changes of the or structure for the first years after the merger.
    • Sources: Xstrata – Glencore merger documentation

Trends & Implications:

  • The global changes of steam/energy coal business are mainly demand-driven. China and India are building coal-fired power stations at a high pace, increasing their share of global demand. At the same time stronger regulation in the Western world and the promise of cheap gas are suppressing the demand. As a result the coal business is getting more global, with a larger part of demand being imported from overseas.
  • The business unit focus of the GlenStrata organization reveals an inclination to try to realize the arbitrage opportunities that make up a large part of the merger’s synergy potential on a product-by-product basis. Global markets for each of the products is diverse enough to make a generic approach to geographic, product, and timing arbitrage unpractical.

©2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 15/’12: Coal in Mongolia, no coal in Australia.

April 9, 2012 Comments off

Top Stories of the Week:

  • Chalco bids for Mongolian coal miner
    • Chalco (holding company = Chinalco) made a tentative $930mln offer for 57.4% ownership of SouthGobi Resources, a Canadian listed company, currently owned by Ivanhoe resources.
    • Sources: Financial Times; Wall Street Journal
  • Coal production issues in Australia
    • BMA, the coal JV between Mitsubishi and BHP Billiton in Queensland, declared force majeure after a week long strike in some of its mines. The labor conflict has been going on for almost a year, with workers campaigning for better contract rights for contracted workers and to retain the union’s power in recruiting decisions.
    • Sources: Financial Times
  • Alcoa again cuts production
    • Alcoa, the largest aluminium producer in North America, announced it would cut alumina production by 2% to support prices.
    • At the start of the year Alcoa cut aluminum production, at that time by 12% and mainly in the USA. The 2% alumina cut is said to be aligned with this 12% ‘final product’ cut.
    • Sources: Wall Street Journal; Financial Times; Alcoa press release

Trends & Implications:

  • The potential Chalco – SouthGobi deal appears to be engineered by or via Rio Tinto. Chinalco owns a significant stake of Rio Tinto, which became the majority shareholder of Ivanhoe recently with the key objective of quickly developing the Oyu Tolgoi gold-copper mine (also in Mongolia).
  • Despite a general demand boom which has not passed aluminum many major aluminum producers are posting losses. Profit margins over the past 10 years average below 10%. The key reason for this situation is an overcapacity resulting in oversupply and high inventory levels. Aluminium is currently one of the very few mined natural resources that could be seen as a ‘demand-driven’ market rather than a ‘supply-driven’ market for price setting. However, as more and more producers cut investment, the demand growth fundamentals should invert this situation in the next couple of years.

Alcoa's long term demand outlook as presented end of 2011

©2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 13/’12: Diamonds are not forever, neither are iron ore chiefs

March 31, 2012 Comments off

Top Stories of the Week:

  • Rio Tinto puts its diamond division up for sale
    • Rio Tinto started a ‘strategic review’ of its diamond business to explore divestment options for the 4 assets. The move comes only months after BHP Billiton announced it intends to sell its only diamond project.
    • Rio Tinto was seen as the most likely buyer of BHP’s Ekati project because of the close proximity to it’s Diavik operation.
    • Sources: Rio Tinto press release; Financial Times; Wall Street Journal
  • BHP Billiton iron ore president quits; replaced by insider
    • Ian Ashby, president of BHP Billiton’s iron ore division, announced he will step down in July. BHP will replace him with the head of the energy coal business: Jimmy Wilson.
    • The leadership change comes during an aggressive investment program to expand capacity of the Pilbara operations.
    • Sources: BHP Billiton press released; Wall Street Journal
  • Indian privatization of coal mines backfires
    • A leaked government report states that the Indian government missed out on $210bln by selling state owned coal assets to cheaply without having a proper auctioning mechanism in place.
    • The hedge fund TCI, which owns close to 2% of Coal India, has started a process to sue the management of Coal India for allowing too much government interference related to the sale of assets.
    • Sources: Financial Times; Times of India; Financial Times II

Trends & Implications:

  • In March of last year Rio Tinto was said to explore a partnership with Alrosa, the world’s second largest diamond miner. This cooperation never materialized, and it appears Rio Tinto’s management has decided the iron ore business does not fit in its strategy of running large scale operations of traded minerals. With the presence of DeBeers and Alrosa it is unlikely that a third player will be able to invest to buy both Rio Tinto’s and BHP Billiton’s operations.
  • India is one of the few mineral rich countries in the world that had to go through a large scale privatization program in the last years. Typically domestic investors who know the businesses and have access to influential officials manage to get good deals in buying assets (Russia is another good example). Often the real value of the formerly government owned assets only becomes apparent after a couple of years of operation in private hands.

©2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 12/’12: Australian tax passed, but BHP warns for demand

March 24, 2012 Comments off

Top Stories of the Week:

  • Australian Minerals Resource Rent Tax finally approved
    • The tax on high profits for Australian iron ore and coal projects which led to a change of premier in the country was finally passed by the parliament last week.
    • Officials from the mineral rich states of Western Australia and Queensland argued that the taxation should be a state arrangement rather than a federal law
    • Many critics expect the MRRT not to bring in the amount of cash the governments expect because of tax management by the largest players and potentially because of lower profit margins as a result of increasing costs.
    • Sources: Economist; Wall Street Journal
  • Mixed signals on China’s iron ore demand
    • In the same week BHP warned that China’s demand for iron ore is slowing down and the Australian state of Western Australia increased its outlook for exports.
    • BHP still is bullish about long term demand in China and does not scale down its investment programs. However, in the short term the company ‘’gives caution” demand might drive down iron ore price to $120/t
    • Sources: Wall Street Journal; BHP Billiton presentation; Financial Times

  • Power struggle for Rusal amidst debt issues
    • A new chairman was appointed to the board of Rusal and his predecessor, mr. Vekselberg, made public that the company was struggling with large debt problems and said it had management problems.
    • Rusal announced that it would write down a large part of the value of its Norilsk stake in an attempt to restructure its balance sheet.
    • Sources: Financial Times 1; Financial Times 2; Lex Video

Trends & Implications:

  • Various of the large Russian miners are trying to diversify both in products and geographic presence. Key problems the companies appear to encounter are a clash of management and corporate governance styles between Russia and western investors and large debt burdens in combination with the need to reinvest most or all of free cash flow to modernize or expand.
  • Australia basically kicked off a wave of mining taxation overhauls in countries around the world. Given the very large output of coal and iron ore operations in the country the implementation of the MRRT will be the most impactful for the overall profitability of the industry. As many of the new tax regimes are based on progressive operating margin scales and operating margins of most companies are decreasing because of cost inflation, it is questionable if the new regimes will result in the income countries are hoping for in the short term.

©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