Archive

Posts Tagged ‘Congo’

Mining Week 02/’12: Temporary & Permanent Cost Increases

January 14, 2012 Comments off

Top Stories of the Week:

  • ENRC settles Congo dispute with First Quantum
    • ENRC agreed to pay $1.25bln to First Quantum to settle the dispute over the Kolwezi Tailings project, the Frontier and Lonshi mines and related exploration interests in DRC. First Quantum was stripped of the rights to these projects by the government, after which ENRC came in and agreed to buy the rights from the government in a move widely criticized in the industry.
    • Sources: ENRC press release; Financial Times; First Quantum press release
  • Coal India agrees to salary costs hike of 25%
    • Coal India, by far the largest miner of energy coal in the country, has agree to a 25% permanent increase of wages. In august of last year the unions demanded a 100% increase to offset increased cost of living and reduce the increasing income gap between management and workers. Investment bankers at the time expected the company to agree to a 15-20% increase. The salary hike results in an increase of operating cost for the company by approx. 10%.
    • Sources: Wall Street Journal; Economic Times
  • Weather in Australia and Brazil drives iron ore price up

    • The closure of the export facilities in Port Hedland because of cyclone Heidi and the cancellation of shipments from Brazil because of heavy rains results in supply pressure in the iron ore market. Heavy rains are expected to continue in the Pilbara region, which supplies close to 40% of seaborne iron ore in the world, in the short term.
    • Sources: Financial Times; Supply Chain Review; Wall Street Journal; Vale Press Release

Trends & Implications:

  • Extreme weather conditions have a big influence on bulk material supply chains in the short term, because stockpiling these materials in amounts large enough to last for several weeks is very costly and thus not a normal practice. Especially the steel industry is hit hard with both iron ore and metallurgical coal having to be shipped in from locations that are often hit by storms. Although the impact on spot prices in the short term can be large, the longer term impact on the miners is quite small. Most contracts allow for some flexibility in when exactly the ore is delivered. As long as the mining operations don’t have to stop, the ore will get to the steel manufacturers as some point.
  • The wage increase expected for Coal India is a good example of the very high cost inflation of mining in developing countries. Whereas the cost increase of contracted services and equipment leasing can be seen as (at least partly) a temporary phenomenon caused by high commodity prices, the cost increase because of increased labor and consumable costs in developing countries causes a more permanent shift of the global cost curves.

©2012 | 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

Vale drops $1.1bn bid to purchase Metorex

July 15, 2011 Comments off

“Brazil’s Vale has dropped its $1.1bn offer for Metorex, a central African copper and cobalt miner, clearing the way for China’s Jinchuan Group to complete a $1.4bn takeover that would establish the state-owned miner in risky frontier markets for metals.

The move came a week after Jinchuan, one of China’s largest mining companies, disrupted its Brazilian rival’s plans by offering R8.90 per share for Metorex. Metorex, however, has not yet recommended Jinchuan’s higher offer to shareholders. Its board will “convene shortly to consider its position with respect to the Vale offer and the Jinchuan offer”, the South Africa-based miner said.

‘Africa is a key focus for our company,’ a Jinchuan executive told the Financial Times. He said it aimed to expand production of copper and cobalt, two industrial metals with rising demand being driven by Chinese consumption.”

Source: Financial Times, July 11 2011

Observations:

  • Metorex is a South African copper and cobalt miner with operations in Zambia and Congo. The company’s board has recommended the shareholders to accept Jinchuan’s offer, paving the way for the takeover of the company. Vale withdrew its inferior bid quoting capital allocation rigor as the reason for not doing a higher bid.
  • Jinchuan is a government owned non-ferrous metals miner. The company has been rumoured to plan an IPO for many years. End of 2010 the company announced a small acquisition in South African platinum mining and furthermore the company bought a Canadian developer of a mine in Tibet.

Implications:

  • The acquisition by Jinchuan is an example of Chinese company’s high willingness to pay for foreign assets. The project is certainly not worth more to Jinchuan than to Vale, which owns assets nearby which could cause synergies. However, Chinese companies are willing to pay a high premium to grow internationally, positioning themselves as state champion in a consolidating industry.

©2011 | Wilfred Visser | thebusinessofmining.com

Copper wars: Lundin deciding on sale

May 13, 2011 Comments off

“Lundin Mining Corp. expects to say by the end of May whether it can reach a deal for the sale of the company as a whole or for the sale of individual assets. ‘We should be in a position…to give some indication (by the end of this month) in terms…of whether a transaction is likely to arise or not,’ Chief Executive Phil Wright said on a conference call Wednesday, following the release late Tuesday of the copper miner’s first-quarter results.
Lundin reported higher year-over-year earnings, but they still fell short of expectations as sales suffered from shipping disruptions. Toronto-based Lundin effectively put itself up for sale at the end of March, after a bid by Equinox Minerals Ltd. scotched plans for a merger with Inmet. Barrick Gold Corp. then agreed to buy Equinox, but Lundin executives said at the time they would continue to seek a buyer. Lundin is open to proposals to either sell the company outright or to sell off its assets piecemeal. But a sale or breakup of Lundin is ‘not a certainty,’ Mr. Wright said Wednesday.”

Source: Wall Street Journal, May 11 2011

Observations:

  • Lundin management is considering options to sell the company after they did not succeed in merging with Inmet and they decided not to cooperate with a sale to Equinox.
  • The company’s most valuable asset is a 25% stake in the world-class Tenke Fungurume project in Congo. Freeport-McMoran holds the majority stake in this project and has the first right to buy Lundin’s stake if Lundin decides to sell.

Implications:

  • The difference in taxation of an asset sale compared to a share sale will be an important consideration for Lundin, although the $100mln taxation hit of a total asset sale corresponds to only some 2% of the company value. Most likely it is easier to get a good price for individual assets (especially Tenke Fungurume) and in that way maximize total value for Lundin’s shareholders.
  • The actions by Lundin’s management to put the company up for sale seem to indicate mr. Lundin, the founder and chairman of the company, has given up the hope to keep his company independent or to merge it with another small party to create a larger player.

©2011 | Wilfred Visser | thebusinessofmining.com

Vale Offers $1.13 Billion for Metorex

April 11, 2011 Comments off

“Brazilian iron-ore giant Vale SA said Friday it will acquire control of South Africa-based copper and cobalt miner Metorex Ltd. for nearly $1.13 billion. The deal will help Vale inch closer to its aim of becoming one of the world’s biggest copper producers, with a long-term production target of one million metric tons a year of the metal.

Vale, which will pay for the acquisition in cash, said the operation still must be approved by Metorex’s shareholders and regulatory bodies in South Africa, Zambia and the Democratic Republic of Congo. As well as being listed on the Johannesburg Stock Exchange, Metorex has a secondary listing on the Frankfurt Stock Exchange and American depositary receipts traded over-the-counter in the U.S. Following the planned acquisition of the entirety of Metorex’s share capital, the company will be delisted, Vale said.”

Source: Wall Street Journal, April 8 2011

Observations:

  • Shareprice of Metorex has doubled since September 2010, driven by high copper price, weakening South African currency. The price jumped from R5.50 to R7.50 in the past 3 weeks.
  • The current 26 thousand ton (long term production target of a million tons of copper per year) adds to Vale’s 208 thousand ton sold in 2010. Other copper expansion projects of the company are the Chilean Tres Valles project and Salobo copper mine in Brazil. These 2 projects together should add approx. 120 thousand tons.

Implications:

  • The stronger diversification into base metals and other geographies is an important means for Vale to become less dependent on iron ore prices. Vale’s 208 thousand tons of copper production compared to 678 thousand tons for Rio Tinto, 913 thousand tons for Xstrata. It is a good sign that the company is trying to grow by carefully selecting bolt-on acquisitions with high growth potential.
  • Next to buying a set of assets and projects with high growth potential located close to the Konkola North project it operates with African Rainbow Minerals, the company gains access to an enormous amount of expertise on doing mining business in Sub Saharan Africa with the Metorex management. Congo clearly is a high-risk business environment, and plunging in greenfield without an experienced management team would greatly reduce the change of success.

©2011 | Wilfred Visser | thebusinessofmining.com

Congo resolves dispute over copper mine

October 27, 2010 Comments off

“Freeport-McMoRan, the US copper mining group, has resolved a long-standing dispute with the Democratic Republic of Congo over control of a vast copper mine by giving cash and shares to the government.

The Tenke Fungurume project, which could be ranked among the world’s top 10 new sources of copper, has been plagued by uncertainty since 2007, when Congo’s government decided to review all mining licences signed during the war in the country between 1998 and 2003.

More than a year of negotiations, thought to have involved the US government in support of Freeport, led to changes to the Tenke licence. Under the new terms, Gecamines, the state mining company, will own 20 per cent of Tenke, an increase from 17.5 per cent. Freeport will pay $30m to Congo “in six instalments after reaching certain production milestones”, as well as $5m in “surface area fees”. “

Source: Financial Times, October 26 2010

Observations:

  • The development of the deposit, staring early 2009, has not stopped during the dispute. However, full production has not yet been reached.
  • The Tenke deposit is owned by Freeport-McMoran and Lundin Mining. Furthermore Gecamines, the state-owned mining company of Congo, holds 20% of the mine’s shares.

Implications:

  • The arrangement between Freeport-McMoran and the government of Congo could be seen as a model for other land right and mining arrangements between foreign mining companies and African governments. A fee for access to the land helps the government to invest in infrastructure, while the parties both commit to the success of the project by tying the payments to production milestones and by both holding a shares of the project.

©2010 | Wilfred Visser | thebusinessofmining.com

Disquiet over ENRC’s purchase of Congo assets

September 7, 2010 Comments off

“Anger is growing among London’s investor community over the decision by a FTSE 100 miner to buy a disputed copper project in the Democratic Republic of Congo.

Eurasian Natural Resources Corp, the London-listed Kazakh miner, last week bought a majority stake in a collection of Congo mining assets that includes the controversial Kolwezi project.

First Quantum Minerals, a Canadian copper miner, is fighting what it sees as the Congo government’s expropriation of Kolwezi and other assets. First Quantum and its partners spent $700m developing Kolwezi until September 2009, when a government prosecutor shut down the project citing contract violations. “

Source: Financial Times, September 3, 2010

Observations:

  • ENRC paid $175mln for a controlling stake of the asset that has been partly developed by Quantum Minerals. The government of Congo seized the asset after Quantum invested $700mln. The company and the government disagreed on the rights given to the company for prospecting and/or mineral extraction.
  • ENRC is strongly integrating vertically, buying mining assets around the world. The potential IPO of Zamin would make the ENRC benefit from the capital this would free up to develop the Bamin iron ore deposit in Brazil, one of the most important projects.

Implications:

  • Though the Kolwezi asset is a financially attractive asset many miners refrained from bidding as the government’s action against Quantum was regarded to violate the business code. Many miners will have been afraid of similar future action of the government in case they would buy the asset.
  • This year the government of Guinea decided to take part of the rights to the Simandou deposit away from Rio Tinto, saying the company did not honor the investment agreements made earlier. Redistribution of these rights have not yet led to a reaction in the mining industry that would hurt the reputation of a future owner of the rights.

©2010 | Wilfred Visser | thebusinessofmining.com