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Posts Tagged ‘coking coal’

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

Rio Tinto suffers decline in output

July 19, 2011 Comments off

“Rio Tinto revealed a steep decline in output at the world’s largest copper mine, demonstrating the mining industry’s difficulties supplying enough copper to keep up with rising global demand. In the first six months of the year Rio’s share of copper production at Escondida, the Chilean mine that accounted for 7 per cent of global production last year, fell 23 per cent to 118,000 tonnes over the same period in 2010.

The drop at Escondida – whose ownership is split between BHP Billiton, Rio, and Mitsubishi – dragged the miner’s total copper output lower by 18 per cent to 273,000 tonnes. Rio, which published its mine-production report on Thursday, disclosed the drop ahead of BHP, the larger partner at Escondida. The production report came ahead of the big miners disclosing their financial results for the first half.

Copper’s deteriorating supply base has helped push the price of the red metal above $9,000 per tonne this year. Analysts expect supply-side problems to influence Rio’s and BHP’s earnings from copper, despite the high profit margins they are enjoying.”

Source: Financial Times, July 15 2011

Observations:

  • Iron ore, thermal coal, and bauxite production increased by 12%, 18%, and 11% respectively compared to the same quarter last year. Main productivity issues are in copper (-24%) and coking coal (-26%).
  • Rio quotes lower grades at the Escondida and Kennecott copper operations as the key reason for the drop in copper production. Weather conditions are the key reason for lower coking coal production.

Implications:

  • Rio Tinto has a very strong portfolio of copper projects, but grades of remaining ore in many old projects is rather low. Other companies mining similar types of deposits face the same issue, resulting in both higher production costs and lower production with the same equipment fleet.
  • Iron ore remains the single key driver of Rio Tinto’s financial performance. Production at the key operations of Pilbara and Hamersley increased. With current commodity prices the company is likely to try to increase capacity at both iron ore and (new) copper operations as fast as possible.

©2011 | Wilfred Visser | thebusinessofmining.com

BHP faces more industrial action at coal mines

June 27, 2011 Comments off

“BHP Billiton Ltd. is facing a third round of industrial action in Australia this week at its coking coal mines, further disrupting output from the world’s largest exporter of the steelmaking material.

Workers at seven mining sites owned by BHP Billiton Mitsubishi Alliance in Queensland state’s Bowen Basin won’t do any “non-rostered” overtime on June 30 and July 1, Stephen Smyth, a division president at the Construction, Forestry, Mining and Energy Union in Queensland, said by telephone today.

Coal mine workers began their second round of strikes on June 24 and they’ll finish on June 29, said Smyth. BHP has been notified about the latest plan and further strikes are possible next week, he said.”

Source: Bloomberg, June 27 2011

Observations:

  • Over 3,000 workers at the BMA coal mines are campaigning for better contract rights for contracted workers and to retain the union’s power in recruiting decisions.
  • BMA is using a contract workforce to minimize loss of production caused by the strikes. Lost production could be up to 130Kt per day, or just over an average ship of export capacity.

Implications:

  • Negotiations are progressing slowly, and will continue to do so as long as production continues. If the unionized staff manages to convince the contract workers (roughly 50% of personnel) to lay down the work the pressure on BMA management would increase.
  • Various other miners in similar situations have shut down operations, fired the staff, and rehired the loyal staff members on own terms. BHP certainly will try to prevent this situation, as it would hurt the company’s reputation as a top employer.

©2011 | Wilfred Visser | thebusinessofmining.com

India in race to snap up coal assets

June 7, 2011 Comments off

“From the mining belts of Queensland, Australia, to East Kalimantan in Indonesia, Indian companies are racing to secure coal assets across the globe. Last year, Indian companies overtook those from China, Korea and Japan as the biggest Asian buyers of overseas coal assets. They were following their US counterparts in trying either to increase their exposure to coal at a time of high commodity prices or lock in fuel supplies for industries such as steelmaking.

Unable to guarantee access to supplies at home because of a mixture of bureaucracy, corruption, logistical and environmental issues, many Indian groups have been aggressively trying to buy assets in Indonesia and Australia. India signed $2.4bn of deals out of a global total of $16bn last year, according to Wood Mackenzie, the consultancy. Meanwhile, Indonesia’s coal association has said it expects India to surpass Japan as the leading buyer of the country’s coal.”

Source: Financial Times, June 6 2011

Observations:

  • According to Ernst & Young’s analysis of M&A in the mining industry over 2010 India has risen to the 7th place worldwide with $5.5bln overall acquisitions in the industry. A large part of India’s acquisitions are aimed at coal mines and transportation infrastructure.
  • Most Indian acquirers of coal assets are private utility-linked companies, which are mainly interested in thermal or energy coal assets.

Implications:

  • The gold-rush mentality of many new players and the resulting high premiums paid for coal assets will help the industry in India consolidate, as the more sophisticated players will soon outperform the players that pay too much for access to resources.
  • The Indian government is trying to mobilize state controlled companies to participate in the bidding for overseas coal assets. The creation of the ICVL consortium and the IPO of Coal India are aimed to create more coordination in government efforts.

©2011 | Wilfred Visser | thebusinessofmining.com

Mongolia’s future as commodities exporter

May 24, 2011 Comments off

“Mongolia is going to be a major future supplier of commodities from coal through gold to copper – and maybe even crude oil. But how soon will this landlocked country with a population of 3m really begin delivering these resources to the world in a significant, market-moving way?

Although Mongolia is located right next to its biggest customer, China, their history of rivalry makes Mongolia suspicious of its southern neighbour. And capricious politics – parliament has tried to oust Dashdorj Zorigt, minister for mineral resources and energy, twice this year – mean that economic logic is sometimes subordinate to politics or nationalism.

Take the development of Tavan Tolgoi, by some calculations the world’s second-largest coal deposit. The government recently scrapped plans to build a railway directly to the border, less than 300km away, even after feasibility studies and initial permits for the line had been granted. Instead a new line will go east, connecting the mines to the Trans Mongolian Railway that leads to both Russia and China, albeit by a longer route. …

There are some exceptions to this pattern: the Oyu Tolgoi mine, which is co-owned by Rio Tinto, Ivanhoe and the Mongolian government, is ahead of schedule and will come online next year. The copper and gold produced there will be shipped out by truck, posing fewer logistical difficulties than the bulky coal. But still, the investment agreement governing the mine took more than five years to negotiate and remains a source of intense political debate.”

Source: Financial Times – Commodities Note, May 20 2011

Observations:

  • Tavan Tolgoi holds estimated coking and thermal coal reserves of 6.4bln tons. Indian ICVL has expressed interest in buying into the project, which the Mongolian government wants to bring to the stock exchange.
  • Rio Tinto’s development of copper and gold deposit Oyu Tolgoi with/through Ivanhoe is the first major foreign investment project in the country, which appears to go smoothly so far. Rio Tinto’s shareholder Chinalco has repeatedly indicated it would like to take part in the project, but has been kept out by Rio Tinto to date.
  • In October last year Ivanhoe was still hoping to export the products from Oyu Tolgoi by rail. In current plans the transport to the Chinese border (80 kilometers) will initially take place using trucks.

Ivanhoe's Oyu Tolgoi logistics plan

Implications:

  • Western companies will try to tease the Mongolian government into collaborating in the construction of direct rail links to the Chinese rail network in the south. The government’s objective in linking the producing region to the Trans-Mongolian Railway mainly is to stimulate domestic processing industry and to gain political leeway in the relationship with China by having the option to supply to Russia. Most likely the corporates and the government will come to a compromise in which the costs of infrastructure development is shared in some way.
  • The elections in Mongolia next year could create a complicated situation for the western miners in the country, as any new government will try to review and/or renegotiate development and royalty deals currently in place.

©2011 | Wilfred Visser | thebusinessofmining.com

Whitehaven ends talks with potential bidders

May 16, 2011 Comments off

“Whitehaven Coal of Australia has ended talks with potential suitors from Asia and the US after a near-seven month auction failed to elicit a ‘sufficiently attractive’ proposal that it could recommend to shareholders. The collapse of the auction saw Whitehaven’s shares fall as much as 16 per cent to A$5.43 before they recovered to close down 80 cents at A$5.63. The group declined to comment on reports it was seeking offers of at least A$7 a share, valuing its business at A$3.5bn.

China’s Yanzhou Coal, which paid A$3.5bn for Australia’s Felix Resources in 2009, was one of a handful of parties interested in Whitehaven, together with Korea Resources Corp, the South Korean state-owned company. Aditya Birla Group, the Indian conglomerate, and Peabody Energy, the US coal group that failed in its attempt to buy Australia’s Macarthur Coal last year for A$3.8bn, were also understood to have examined a bid for Whitehaven.”

Source: Financial Times, May 16 2011

Observations:

  • A Korean consortium led by Kores launched the only published bid for Whitehaven in February. Whitehaven started an auction procedure after being engaged by other potential bidders. It now appears none of the auction participants is willing to offer a satisfactory price.
  • The recent rise of the australian dollar makes the purchase of Australian assets less attractive. Commodity markets are setting prices in American dollars, while Whitehaven’s costs are mainly in Australian dollars. As a result, costs increase without revenues going up by the same ratio.

Implications:

  • Both the Australian and the American coal mining sectors are going through a wave of consolidation. However, the Australian market is less fragmented, leaving fewer opportunities for interesting mergers.
  • The key driver for consolidation in North America is cost pressure and the access to export capacity, while the drive by Asian steelmakers to secure supplies of coking coal are the key driver for the same movement in Australia (and South East Asia).

©2011 | Wilfred Visser | thebusinessofmining.com

Korean Consortium Leads in Whitehaven Coal Takeover

February 17, 2011 Comments off

“In the latest scramble for Australia’s resources by Asian consumers worried about energy security, a Korean consortium has made an initial offer to buy Whitehaven Coal Ltd., a company valued at 3.5 billion Australian dollars (US$3.5 billion).

The non-binding offer by Korea Resources Corp., known as Kores, and Daewoo International Corp. underscores how volatility in commodity markets is driving consumers to bid more aggressively for high-quality reserves that can be shipped home. Coal prices recently surged to two-year highs after major mines around the world were hit by heavy flooding.

Whitehaven, which produces coking coal used in steelmaking and thermal coal used in power generation from five mines in New South Wales state, put itself up for sale last year in a move to capitalize on this wave of acquisition activity. Updating the market Feb. 7, Sydney-based Whitehaven said short-listed parties have been invited to complete more detailed due diligence and submit binding offers. It didn’t identify potential buyers, but the market expects companies from China, the U.S. and India to be involved.”

Source: Wall Street Journal, February 15 2011

Observations:

  • Whitehaven started an official takeover procedure, in which a list of potential bidders is invited to bid for the company based on information provided by the seller in a data room, last year. Initial offers were due of February 2nd, with binding offers expected over the coming month.
  • Driven by increasing coal prices, various Asian companies have bought Australian coal assets to secure access to raw materials over the past 18 months. China’s Yanzhou Coal Mining, Thailand’s Banpu Energy, and India’s Adani secured deals. China Shenhua (which owns assets near Whitehaven’s mines) and Indian ICVL are named as potential competing bidders for Whitehaven.

Implications:

  • The Korean Consortium will likely not be the only bidder in the takeover process. Typically multiple bidders are led to submit an offer in a takeover procedure in order to maximize the price paid for the company. Potential bidders without operating assets in Australia are not expected to be able to realize high synergies, making the bidder that is prepared to take most risk or that is most optimistic about the value ‘win’ the battle.
  • The buyer of Whitehaven might face regulatory obstacles from Australia’s Foreign Investment Review Board, which forced Yanzhou Coal Mining Co. to list the Australian assets in Australia to keep control over the domestic energy industry.

©2011 | Wilfred Visser | thebusinessofmining.com

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