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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

Mining M&A – Top 40 Share attractiveness ranking

August 4, 2012 Comments off

Valuations across the mining industry are coming down as a result of low commodity prices and uncertainty about the future of the global economy. Many companies are reviewing investment plans, pressured by investors to return money to shareholders if the project pipeline is short of feasible investment opportunities. Most companies in the industry will be extremely careful with large-scale M&A at this moment, but for some companies with either a lot of cash or a good position to give out more equity the reduced prices could provide opportunities to make a big acquisition. The ranking presented below presents the attractiveness of acquiring any of the Top 40 mining companies.

An acquisition of any of the world’s largest 40 miners will have to be financed to a large extent by raising additional capital from equity holders, as the acquisition price would be too high for most companies to pay cash after taking on more debt. The attractiveness of executing a share deal to acquire a company is split into the current level of share depression (historic performance) and the outlook for the share as given in analyst targets (future performance).

The share depression is represented in the chart and the ranking below by taking the ratio of current share price compared to 52-week high, normalized to the performance of BHP Billiton, the largest company in the group (i.e. share depression of BHP Billiton = 1.0). The 52-week high is used surprisingly often in acquisitions as the price paid, as it is easy to accept for many shareholders of the target company that they will receive the highest price over the past year.

The outlook for shares is given by the ratio of consensus analyst target dividend by current share price. Whatever the historic performance of a share, the outlook ratio shows the expected potential for the share. For these large mining companies the consensus target is typically formed out of at least 10 equity analyst and banker targets. An overall ranking score of share attractiveness is calculated by dividing the outlook ratio by the share depression ratio.

In this initial ranking of attractive targets, using closing share price of August 3rd 2012, the top 5 positions are claimed by ENRC, Ivanhoe, Kinross, Peabody, and Anglo American. Each of these shares has taking a significant beating over the past year. Apart from Anglo they have all dropped about twice as far from their year high share price as BHP Billiton. However, analyst targets for each of the companies are high too, each being expected to gain at least 50% of value in the relatively short term. The combination of a big drop in share price and a promising upside makes the companies attractive for potential buyers. Clearly many more factors play a role in target selection, and politics, synergy potential, and several other factors rule out quick action for most of the top targets in the ranking. However, the chart and ranking below do serve well as a quick scan to see which companies are in the ‘danger zone’ of becoming an acquisition target.


©2012 | Wilfred Visser | thebusinessofmining.com

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

Little change for ENRC board

October 3, 2011 Comments off

“An internal review at Eurasian Natural Resources Corp, launched after of a corporate governance debacle that saw two directors ousted at the mining company’s annual meeting, has left the management and board almost unchanged. Johannes Sittard, chairman and former chief executive, remains chairman. Felix Vulis, who resigned in February citing commitments in his family life, has been restored as permanent chief executive.

The three-month review of corporate governance at the embattled FTSE 100 company, which has lost almost half its stock market valuation in 2011, includes the board appointment of Terence Wilkinson, a former chief executive of Aim-quoted Ridge Mining and Lonrho. The review, which concluded on Wednesday night, focused on whether the board of ENRC, a company that is largely controlled by three central Asian entrepreneurs with no board seats, should remain fully independent of the three men or become a more actively family-controlled miner akin to Vedanta, Fresnillo, and Antofagasta.”

Source: Financial Times, September 29 2011

Observations:

  • One of ENRC’s founders, mr. Alexander Mashkevich, was rumoured to be interested to take over the presidency of the company. However, within days of the publication of this story the results of the review were announced.
  • The review restored a majority of independent board members for the company, which was lost after various board members left or were not reelected earlier this year in a power struggle in the board.

Implications:

  • In the current situation about 70% of the shareholders are not represented in the board. This might lead to disagreement between board and shareholders in the case of a potential takeover bid. In June Glencore was said to be interested in buying ENRC, which has lost a lot of market value in the past year.
  • The Kazakh government and Kazakhmys together hold close to 40% of the shares. Both parties will not be in favor of the 3 founders (the Troika) gaining more control over the company and will be happy mr. Mashkevich does not join the board.

©2011 | Wilfred Visser | thebusinessofmining.com

Glencore denies acquisition after ENRC board meltdown

June 14, 2011 Comments off

“Commodities trader Glencore (LSE:GLEN.L – News) is not considering a bid for embattled miner ENRC, its chief executive said, dismissing reports of a takeover after it disappointed the market with its maiden first-quarter results. Shares in the world’s largest diversified commodity trader dropped 2 percent as weaker-than-expected results from its metals and mining trading unit held back its operating profit.
Kazakh miner ENRC, with a free float of less than 20 percent, has long been seen as a potential target for Glencore. Industry sources say Glencore could be tempted by its undervalued assets and a heavy fall in the shares as a result of a boardroom spat over its leadership that has seen the departure of two independent directors.
‘Glencore monitors a wide range of opportunities in the sector and will continue to do so,’ Chief Executive Ivan Glasenberg told reporters following the company’s results. ‘However, we can confirm that although we talk to a lot of people in the sector, we are not actively considering a bid for ENRC,’ he added.”

Source: Reuters, June 14 2011

Observations:

  • Following a review of ENRC’s governance structure various independent directors and the general counsel have either left or have not been reelected by the majority shareholders. The leaving directors claim that the company is run authocratically and the owners are not willing to open up control.
  • Glencore was rumoured to be interested in launching a takeover for ENRC, which suffers from a depressed shareprice. However, Mr. Glasenberg (Glencore CEO) said the company wasn’t holding any discussions to purchase ENRC when announcing Glencores 1st quarter results.

Implications:

  • A potential acquisition of ENRC by Glencore would only have chance of success if the founders are willing to sell their shares. The Kazakh government is unlikely to sell its stake in the company and the total share of ownership of the 18% free-float and the Kazakhmys share would not enable Glencore to excercise control.
  • Many analysts are trying to figure out which large mining company will be Glencore’s major acquisition target. As long as not further equity is raised the company will be able to make an acquisition up to a value of some $30-40bln. The target should mainly be complementary to Xstrata’s global operations, as it is likely that management of the owned and controlled operations is centralized in the coming years.

©2011 | Wilfred Visser | thebusinessofmining.com

ENRC tensions grow as two directors dismissed

June 9, 2011 Comments off

“Private feuding within Eurasian Natural Resources Corporation, the Kazakh miner, spilled out into the open on Wednesday as investors in the tightly held company overwhelmingly voted against the re-election of Sir Richard Sykes, the senior independent director, and fellow board member Ken Olisa.

The public dismissal of the two directors highlights the deepening tensions within the FTSE 100 miner. It has been dogged by corporate governance concerns since it floated in 2007. Speculation about boardroom battles has intensified since the group announced controversial acquisitions in central Africa last year, most notably the purchase of mining assets in the Democratic Republic of Congo that the Congo government had recently expropriated from a Canadian mining company.

In particular it will focus attention on the position of foreign companies that list in London and rely on City grandees to give comfort to shareholders. The presence of boardroom heavy-hitters was especially valuable to ENRC during last year’s controversy over acquisitions in Africa, most notably the purchase of mining assets in the Democratic Republic of Congo that the government had recently expropriated from a Canadian mining company.”

Source: Financial Times, June 8 2011

Observations:

  • ENRC was formed in 2006 by consolidation of assets privatized in the mid ’90s. The founders are Alexander Mashkevitch, Alijan Ibragimov, and Patokh Chodiev; each still holding 14.6% of the shares, with the Kazakh government holding 11.7% and Kazakhmys 26%. Because Kazakmys abstained from voting the founders and government held at least 75% of the voting shares.
  • Current CEO Felix Vulis announced his departure in February, and the founders are rumored to want to replace several other executives and board members. The dismissal of the directors has tipped the weight of the board to the founder’s side, giving them significant power.

Implications:

  • Unless the dismissal of the independent directors came as a surprise to the persons in question the fact that they did not make a quiet move out of the board should be understood as a means to draw the attention to the governance issues of the miner. It appears that the founders and the Kazakh government want to strengthen their control over the company, even though it has mainly been expanding internationally in the past years.
  • The debates in the board about the acquisition of the projects in Congo including the Kolwezi asset, formerly owned by First Quantum, indicates a cultural difference between the Kazakh hardliners and the more western independent directors with more eye for corporate social responsibility. With various other Eastern companies listing on western stock markets this will be an issue that will surface more often in the future as many development projects are undertaken in politically unstable areas.

©2011 | 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

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