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Posts Tagged ‘De Beers’

Mining Week 34/’12: Lonmin labor dispute turns deadly

August 18, 2012 Comments off

Top Stories of the Week:

  • Fights between police and striking Lonmin workers results in over 40 deaths
    • Over 40 miners and several police officers were killed in clashes with the police at Lonmin’s Marikana mine in South Africa, where workers had been on strike for about a week demanding wage increases.
    • Competing trade unions trying to ‘control’ the workforce are mentioned as part of the reason the conflicts turned into strikes and violence.
    • On August 16th, in the midst of the developments around the violence in South Africa, Lonmin’s CEO was diagnosed with serious illness and is temporarily replaced by the chairman of the board.
    • Sources: Lonmin press release; Mining Weekly; Wall Street Journal
  • Anglo American finalizes acquisition of 40% stake in De Beers
    • Anglo American paid $5.1bln for the 40% stake of De Beers previously owned by the Oppenheimer family. The company now owns 85% of the major diamond producer.
    • The deal was announced announced in November of last year; diamond prices have dropped significantly since that announcement.
    • Sources: Anglo press release; Financial Times

Trends & Implications:

  • The global platinum market is facing significant oversupply, keeping prices low and pushing platinum miners into the red. Lonmin is the highest cost producer among the major producers, putting it in a position in which is can’t keep workers satisfied without pay raises while it can not raise wages without making big losses. Anglo Platinum currently controls approx. 40% of global production in mines in South Africa and Zimbabwe. Various other miners have called on Anglo to cut production to make prices rise.
  • The social and political situation in South Africa is causing most international mining companies without strong ties to the country to think twice before investing in the country: high tax rates, active and unpredictable unions, political leaders calling for mine nationalization, and the startup of a ‘national mining company’ result in a very high country risk level.

©2012 | Wilfred Visser | thebusinessofmining.com

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Mining Week 45/’11: Anglo takes control of De Beers

November 6, 2011 Comments off

Top Stories of the Week:

  • Anglo American adds 40% to its 45% stake of De Beers to gain control
    • Anglo American agreed to pay $5.1bln to the Oppenheimer family to gain control of diamond miner De Beers. The other 15% are owned by the government of Botswana. De Beers changed CEO in May of this year and tried to strengthen partnerships and simplify the ownership structure.
    • Sources: Anglo American press release; Wall Street Journal
  • China: 8 die, 45 rescued in coal mine disaster
    • A blast in a state-owned underground coal mine killed eight miners. 45 miners that were initially trapped underground were rescued within two days via a rapidly excavated tunnel.
    • Sources: AFP; Wall Street Journal

Trends & Implications:

  • Diamonds already accounted for 11% of Anglo American’s revenues, and will get close to 20% now. The simplified ownership structure will help De Beers to undertake the large investments in both new project development and modernization of current operations required to retain its leadership position in the global diamond business. Additionally, Anglo Americans global footprint will help De Beers to diversify its production footprint, which is still heavily skewed towards Botswana.
  • Safety in Chinese mines is still far below Western standards, but under pressure of federal regulation the situation is improving rapidly. Unsafe mines are often forced to close temporarily, and rescue teams are becoming better equipped to safe the lives of trapped miners. Official numbers show a 2/3 decrease of fatalities in the past 10 years. However,the surge of coal demand in the country is putting the safety improvements under pressure, as mine management is willing to go a long way to increase output.

©2011 | Wilfred Visser | thebusinessofmining.com

Anglo American lifted by commodities boom

July 29, 2011 Comments off

“Anglo American has taken advantage of booming commodities prices to boost its interim pre-tax profits by more than two-thirds. A flight to safety among nervous investors has driven up prices for precious metals and diamonds, buoying first-half revenues by more than a fifth at the FTSE 100 miner and prompting Anglo to increase its dividend by 12 per cent.

Strong demand in China has also pushed up prices for iron ore and copper, helping Anglo shrug off the weak US dollar and harsh weather conditions in South Africa and Australia, which included the extensive flooding in Queensland earlier this year.

Anglo has an investment pipeline of $66bn to develop its iron ore and copper mines in South America and coal projects in Australia in order to reap the rewards of booming commodity prices.”

Source: Fincial Times, July 29 2011

Observations:

  • Good financial performance was offset by very poor safety performance: the group recorder 10 fatalities in the last 6 months (8 in the platinum business).
  • $450mln of the revenues (11%) are achieved in De Beers’ diamond business. Iron ore & Manganese (26%) and Platinum (23%) account for the largest share of Anglo’s revenues. Iron ore & Manganese (29%) and Copper (28%) bring in the largest part of the earnings, driven by particularly high commodity prices.

Implications:

  • Focus of Anglo American’s presentation was on expanding production (capex of $2.3bln for 2011H1 with pipeline of $66bln) and on cost control. The company’s operating profit compared to the same period last year suffered from $500mln higher cash costs. Input cost pressures were explained in detail in the investor presentation (see below) For each product the management presented initiatives for cost reduction.
  • Iron ore volumes (-12%) and metallurgical coal volumes (-19%) were down compared to the same period in the previous year, caused by weather disruptions that put BHP Billiton and Rio Tinto in the same position. It will be interesting to see the method of reporting the volumes next year if production can go on without interruptions. Higher volumes will then most likely be presented as significant achievements, without any mention of the disruptions of this year.

©2011 | Wilfred Visser | thebusinessofmining.com

De Beers appoints new chief executive

May 17, 2011 Comments off

“De Beers has ended a prolonged leadership search by hiring a French engineering executive with no experience in diamonds, mining or South Africa. The South Africa-based diamond miner appointed Philippe Mellier as chief executive on Monday. Mr Mellier pursued a career at Ford Motor and Volvo before becoming president of Alstom Transport, the train-making division of the French engineering group.

Nicky Oppenheimer, De Beers’ chairman and guardian of his family’s 40 per cent stake in the company, told the Financial Times that experience in the diamond industry was not an important part of the selection process. ‘We have plenty of experts at running mines. We have plenty of experts in marketing diamonds,” he said. “The key thing is that Philippe has run world-class operations and substantial capital projects, and has experience dealing with joint venture partners.'”

Source: Financial Times, May 16 2011

Observations:

  • De Beers is the world’s second largest diamond miner, with operations mainly in Botswana and Canada. It mined 33mln carats last year. Anglo American holds 45% of De Beers shares.
  • In Mellier’s previous job he was president of Alstom’s transport division with €5.8bln annual sales. Joining Alstom in 2003 his key activities in the first years were to divest non-core businesses, while the company had to be bailed out by the French government. In later years he achieved success in winning government contracts for transport systems and buying into a Russian producer.

Implications:

  • The fact that an industry-outsider with experience in partnerships has been recruited indicates the board’s strategic priority for the next 5 years: strengthening ties with the Botswana government and probably setting up other partnerships to expand.
  • A key challenge for Mellier and Anglo’s Cynthia Carroll will be to decide on potential simplification of the ownership structure of De Beers. A potential buyout by Anglo American or flotation of the company to provide funds for expansion have been discussed for years. Whatever decision made, it will have to be aligned with Botswana’s government, which holds 15% of the company but receives a large part of the profits.

©2011 | Wilfred Visser | thebusinessofmining.com

Anglo American: Restructured and competitive again

February 21, 2011 Comments off

“Anglo American performed strongly in 2010, both operationally and financially, and we have continued to deliver on our clear strategic objectives. In addition to benefiting from higher commodity prices, our focused commodity businesses are driving superior operating performances, through major productivity improvements, disciplined cost management and the benefits of our asset optimisation and global supply chain programmes. We completed a number of sales of non-core businesses during 2010 and into 2011 and our divestment programme is now well advanced. Anglo American’s EBITDA of $12.0 billion, operating profit of $9.8 billion and underlying earnings of $5.0 billion, reflects delivery on all fronts.

We have transformed our Platinum business, moving it down the cost curve, with 23% productivity gains and cash operating costs controlled below inflation, and further safety improvements, while exceeding our refined platinum production target of 2.5 million ounces. Our Kumba Iron Ore, Metallurgical Coal and Nickel businesses also delivered productivity gains, while the benefits of the restructuring of De Beers are clear to see, with the business reaping the rewards of the much improved environment for diamonds.”

Source: Anglo American press release, February 18 2011

Observations:

  • Anglo American’s revenue, EBITDA and Earnings per Share outperformed analyst’s average expectations. Contrary to BHP Billiton and Rio Tinto the company managed to keep controllable costs stable while increasing output.
  • Capex for the next 3 years is planned at $16bln, below planned investments for the main competitors. However, the company has a strong exploration portfolio, especially in thermal coal, copper and platinum.

Implications:

  • The company did announce dividends, but is not yet planning to buy back shares. As the company now holds over $6bln in cash it might be aiming for targeted acquisitions in the near future.
  • The high commodity prices of last year have helped all major diversified miners to reduce gearing to low levels (Anglo American now at 16%). The low gearing and the high cash flow from operations will enable the miners to undertake large projects, both in organic growth and M&A.

©2011 | Wilfred Visser | thebusinessofmining.com

Russia’s Alrosa shaping up for flotation

December 21, 2010 Comments off

“Alrosa, De Beers’ Russian rival, is considering a stock market flotation in 2012 in a move that would open the traditionally closed diamond industry to outside investors. Alrosa, controlled by Russia’s federal and regional governments, has long been the second-largest producer of diamonds behind De Beers. In 2009 the two companies mined half of the world’s diamonds, measured by carat volume. Both are private, limiting opportunities for investors in a commodity that is expected to face a supply crunch in coming years.

Fyodor Andreev, Alrosa’s chief executive, has said this would change next year. The Siberia-based miner is converting itself from a closed to an open joint stock company – or from a ZAO to an OAO in Russian corporate terminology. This will allow outside investors to buy new shares and relax ownership restrictions on the tightly-held miner.”

Source: Financial Times, December 19 2010

Observations:

  • Alrosa is currently owned by federal and regional governments. It operates mines in Russia and Angola, accounting for 25% of global carat production and 97% of the Russian production.
  • Total equity value of the company is highly uncertain, making an IPO a high-risk way of raising money. Company profit over 2009 was approx. $110mln, while loss over 2008 was approx. $1bln. The company income appears to suffer from very high cost of debt, with interest rate on interest bearing debt at approx. 13%.

Implications:

  • Alrosa will need considerable amounts of cash to be able to move to underground mining in various mines in Siberia. As the governments are not able to provide the money required for this expansion, they are forced to open up the shareholding structure to attract capital from the market.
  • Although the ownership of the company will be loosened, it is unlikely the free floating shares will be a major part of the total company ownership. However, the redistribution of government ownership might cause internal struggles: the federal government currently holds just over 50% of the shares, which would be diluted to below 50% after an IPO.

©2010 | Wilfred Visser | thebusinessofmining.com

Joint Venture Finds Gold on Ocean Floor

December 10, 2010 Comments off

“AngloGold Ashanti Ltd.’s marine exploration venture with diamond giant De Beers SA has turned up gold on the ocean floor and continues to hunt for large deposits, the gold producer’s chief executive said Friday.

Two vessels belonging to De Beers are two-thirds of the way through their exploration off the coast of New Zealand and continue to search off South Africa and Canada, Mark Cutifani said in an interview at the company’s Johannesburg head office.

‘We are finding gold, but the key will be finding those areas where the grades [of the gold found] cover the cost,’ he said. ‘We aren’t there yet.'”

Source: Wall Street Journal, December 10 2010

Observations:

  • AngloGold Ashanti and De Beers have teamed up to combine their knowledge of marine mining and gold deposits, hoping to find underwater deposits of gold.
  • AngloGold has put in $40mln for 3 years of exploration, a very small amount compared to the billions spend in the exploration industry on land annually.

Implications:

  • The only implication of the announcement by AngloGold’s executive is that the most interesting places that were explored by the joint venture don’t hold levels of gold that make underwater mining feasible.
  • A successful exploration effort by the JV might cause a strong increase of sub sea exploration efforts. Dredging companies, specialized miners are the most likely actors in this area, as there are very few synergies between undersea mining and traditional mining apart from processing of the dredged/mined material.

©2010 | Wilfred Visser | thebusinessofmining.com

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