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M&A Share Attractiveness Ranking – February 2013

February 17, 2013 Comments off

The latest update of the M&A share attractiveness ranking for the world’s 40 largest mining companies demonstrates the current slump of gold (and to lesser extent copper) mining stocks. Discounting Ivanhoe, which has been taken out by Rio Tinto, ENRC tops the list of companies that might become the target of an acquisition. The company’s stock moved higher over the past weeks on acquisition rumors, reducing its attractiveness ranking, but analysts still see approximately 50% upside in the stock. Behind ENRC the ranking is dominated by gold and copper miners, with Anglo American the only non gold or copper miner in the top 10. Low gold and copper prices and the emergence of gold ETFs has depressed the share price of the miners over the past year, but most analysts still expect better times for this group of miners.

The thebusinessofmining.com M&A share attractiveness ranking is a combination of analyst expectations and current share level compared to the annual high, normalized against BHP’s share performance. The ranking provides a market perspective of how ‘cheap’ a stock is for potential acquirers.

Mining M&A - Share attractiveness chart - 130217

Mining M&A - Share attractiveness ranking - 130217

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Mining Weekly 52/’12: Copper Wars continued, South African taxes

December 24, 2012 Comments off

Top Stories:

  • Copper Wars: First Quantum raises takeover bid for Inmet
    • Almost 2 years after the consolidation in the copper mining industry was accelerated by the proposed merger of Lundin and Inmet, First Quantum is trying to take over Inmet to form a major copper producer. Inmet’s board rejected two earlier, lower bids, and is now facing a $5.1bn takover offer.
    • The proposed Lundin-Inmet (Symterra) merger did not materialize because Equinox made a takeover bid for Lundin, after which Equinox was acquired by Barrick, which ‘won’ a bidding war with Minmetals.
    • In attempts to get the Cobre Panama project funded Inmet earlier this year sold a stream with most of the planned precious metals production to royalty company Franco Nevada for an investment of approx. $1bn.
    • Sources: Wall Street Journal; Financial Times; Newsday

    Copper Wars - Inmet - First Quantum

  • ANC will not nationalize South African mines, but wants to increase taxes
    • The ruling ANC party has turned down a plan to nationalize the mining sector in the country. At the same time the party leaders do call for increased taxes to keep a larger part of the benefits from natural resource extraction in the country. No details on the tax increases have been given yet.
    • Sources: The Globe and Mail; Wall Street Journal; Financial Times

Trends & Implications:

  • The copper industry is in a phase of consolidation because many large development projects are in the hands of relatively small miners who don’t have the funds to develop the large projects on their own. With project pipelines being scrutinized in the light of slowing demand growth, large miners are searching for and buying those projects that are actually going to make it, and small miners with and without good development projects try to team up to combine operating assets with strong development projects.
  • South Africa is already one of the countries with the highest effective tax rates to mining companies in the world, combining a 28% income tax rate with a 10% secondary tax, and adding mining royalties depending on the mineral mined. Further tax increases will make it very unlikely that foreign companies try to enter into the South African mining landscape, but will also make it more attractive for the large South African players to try to expand abroad.

2012 | Wilfred Visser | thebusinessofmining.com

Mining Weekly 51/’12: Freeport, Xstrata, & Bumi

December 16, 2012 Comments off

Top Stories of December:

  • Freeport diversifies further into oil & gas
    • Copper miner Freeport McMoran surprised the market by acquiring two American oil & gas companies for approx. $9bn, taking on a lot of target debt to make a total deal size of approx. $20bn, the second largest acquisition in the industry this year.
    • Freeport did not request shareholder approval for the diversifying acquisitions, leaving a large part of the shareholder base unhappy with the deal and the stock price dropping approx. 15%.
    • Sources: Freeport presentation; Wall Street Journal; Financial Times
  • Xstrata puts Tampakan project on hold
    • Xstrata’s $5.9bn Tampakan copper project in the Philippines is put on hold while waiting for government approvals: the federal government doesn’t want to give the go ahead before the mining law is reformed, and the local government is opposing the issuance of an environmental permit based on a ban on open pit mining.
    • Sources: Reuters; Sagittarius / Xstrata
  • Bumi, Bakrie, and Rotschild continue their fight
    • The board of Bumi plc has indicated that it favors the Bakrie offer to buy out the assets of the Indonesian coal producer over Rothschilds offer to increase the stake in those assets. Bakrie’s offer implies that the shared ownership of assets by Bumi and Bakrie comes to an end.
    • The board also indicated that it does not intend to sell the stakes in Berau to Bakrie, which would mean the company does not completely revert to a cash shell.
    • Sources: Financial Times 1, 2; Jakarta Post

Trends & Implications:

  • Deloitte published its annual report with the top trends in the mining industry for the coming year: on top of the list is the continued high cost of doing business, which is forcing many companies to reconsider development projects (see Tampakan above). The full list of trends is:
      Deloitte - tracking the trends 2013

    • Counting the costs: Paying the price of bullish behavior
    • Managing demand uncertainty: Conflicting market indicators magnify volatility
    • Capital project deceleration: Quality trumps quantity in the project pipeline
    • Preparing for the M&A storm: Market indicators point to rising deal volumes
    • Governments eye the mining prize: Resource nationalism remains
    • Combating corruption: Miners are being held to higher standards
    • Climbing the social ladder: A new level of responsible behavior
    • Plugging the talent gap: Skills shortages still loom
    • Playing it safe: Using analytics to generate insights and improve safety outcomes
    • At the IT edge: Getting the most out of emerging – and existing – technologies
  • Xstrata’s decision to put the Tampakan project, one of the largest development projects in the copper industry, on hold fits two trends: the increasing importance of alignment with both federal and local governments in developing countries, especially around when governments and legislature are changing; and the hesitance to undertake any large investments in a time of rising costs and uncertainty around demand growth.

2012 | Wilfred Visser | thebusinessofmining.com

Check my latest column in the free online journal The International Resource Journal on the importance of iron ore derivatives.

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 23/’12: Investment dilemmas for BHP and Fortescue

June 3, 2012 Comments off

Top Stories of the Week:

  • Rumour around retention plan for Xstrata executives
    • Several major shareholders have voiced discontent with the approx. $370mln retention bonuses for the top 72 executives of Xstrata that has been made part of the vote on the Glencore-Xstrata merger.
    • Sources: Financial Times 1; Financial Times 2; Wall Street Journal
  • Australian state governments fight for BHP investment
    • BHP Billiton received environmental clearance for the expansion of Port Hedland’s iron ore harbour. The project could cost around $20bln up to 2022 to increase export capacity to 350Mtpa.
    • The government of Southern Australia is pressuring BHP to start the expansion of its Olympic Dam copper/uranium project before the end of the year, threatening not to extend the permits. The Olympic Dam expansion is one of the key projects that might be cancelled or delayed as BHP tries to limit investment and return money to shareholders.
    • Sources: Bloomberg; Business Spectator; Financial Times
  • Fortesque worries about debt servicing
    • Fortescue, Australia’s third largest iron ore miner, is close to completion of an expansion that will enable it to export 155Mtpa iron ore.
    • The CEO of the company has indicated that it will focus on repayment of debt before undertaking further expansion. The company has received negative feedback from investors because of its high gearing. Its Debt/Equity ratio stands at approx. 45%, versus 26% for Vale and Rio Tinto and 15% for BHP Billiton.
    • Sources: Fortescue media release on expansion progress; Wall Street Journal; 9News

Trends & Implications:

  • If BHP decided to press on with the Port Hedland expansion at the expense of large development projects in other business units that would be a next sign that the supermajors are preferring the relatively predictable iron ore market over further diversification. Both Rio Tinto and BHP Billiton are considering sale of their iron ore business, BHP is in the process of reviewing the options for its Australian manganese operations, and Vale reached a deal last week to dispose its coal operations.
  • The proposed retention bonuses for the top 72 managers of Xstrata add up to around $370mln, an average of some $5mln per person, 4% of last year’s profit, roughly 1-2 annual executive salaries per person, about $0.8 per share, or some 0.1% of share price. The bonuses are set up to keep the managers with the company for at least another 3 years. Even though we are talking about a lot of money that could trigger ethical debate about the executive pay in the industry, the shareholders hardly have any ground to protest the plan from a business perspective. Retention of the top managers after the merger should certainly enable the company to get a quick payback on the $370mln.

©2012 | Wilfred Visser | thebusinessofmining.com

Mining News 22/’12: Codelco CEO change; Australia recruits overseas

May 28, 2012 Comments off

Top Stories of the Week:

  • Codelco’s CEO quits
    • Diego Hernandez, Codelco’s CEO, decided to quit prior to the end of his terms for personal reasons. Conflicts around the level of interference by the board in management of the government-controlled company are mentioned as the reason. CFO Thomas Keller will take over as CEO.
    • The change of CEO comes in a critical period for Codelco as it is in a legal battle with Anglo American about the ‘Sur’ project, in which Codelco claims to have the option to buy a larger part than Anglo wants to sell.
    • Sources: Financial Times; Wall Street Journal; Reuters
  • Australia implements law to make hiring immigrant workers easier
    • Australia’s new Enterprise Migration Agreement (EMA) makes it possible to bring in foreign workers on fixed term contracts for projects with an investment of $2bln or higher and a peak workforce of over 1500 employees.
    • The EMA takes a project-wide labor agreement approach, making it possible to have subcontractors bring in people via the overarching project agreement.
    • Sources: Australian government; Wall Street Journal; Financial Times
  • GlenStrata focuses on retention of Xstrata executives
    • As part of the merger deal with Glencore the Xstrata shareholders will get to vote on a $78mln bonus for Mick Davis to stay on for another 3 years. Other executive directors will be offered retention bonuses too.
    • Sources: Financial Times; Reuters;

Trends & Implications:

  • Australia’s EMA will mainly be used for low skilled construction workers. The shortage of highly skilled planning and engineering employees is unlikely to be resolved as those contracts are typically not fixed-term and not project-specific. The Australian government expects it needs to add 89 thousand short-term workers in the next years. Still the unions, which are very powerful in Australia’s resources sector, are complaining about the Agreement, saying that bringing in workers for overseas will hurt the domestic labor market. A key issue in the flexibility of this market is that many workers are available in the East coast region, but most of the work is available in the remote areas on the West coast.
  • As ‘deal-friendly’ investors have built up a share ownership that makes it likely that Xstrata’s shareholders will vote in favor of the merger with Glencore in the currently proposed 2.8x share proportion, the focus of management activity shifts back to regulatory issues and planning for post-merger activities. A key issue in th successful integration of the companies will be to join the corporate cultures of the trader and the miner. The retention efforts will likely go further than just executive leadership, targeting several hundreds of top management. At the same time the company will have to work on retaining the top traders and top management from Glencore’s side.

©2012 | Wilfred Visser | thebusinessofmining.com

Recycling & the Future of Mining

April 15, 2012 7 comments

For thousands of years the mining industry has supplied the world with the raw materials the growing population needed for ever increasing consumption. However, mining is not the only supplier of these raw materials. Next to the primary mining industry a secondary mining industry is growing: ‘urban mining’. The existing stock of materials in the urban environment is recycled more and more. 38% of iron input in the steel making process comes from scrap. The average ‘new’ copper cable contains some 30% recycled material. The more we recycle, the less we need to mine. As mining costs increase because ‘easy’ mineral deposits are becoming scarcer and as technological improvements make recycling more competitive, the impact of urban mining on the traditional mining sector grows. How does this change the perspectives of the mining industry in the long term? And which factors will play an important role in shaping this future?

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