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Posts Tagged ‘fertilizer’

Mining Week 45/’12: PotashCorp and Rothschild on the offensive

November 4, 2012 Comments off

Top Stories of the Week:

  • PotashCorp in talks to acquire ICL for $14bn
    • PotashCorp, the Canadian phosphate miner that was subject of a $39bn takeover attempt by BHP Billiton in 2010, is in talks with the Israeli government to acquire Israel Chemicals (ICL) and merge it with its own operations. PotashCorp already holds a 14% stake of ICL. The remaining share is worth roughly $14bn.
    • In an initial reaction the Israeli government, which holds a golden share in ICL’s mother company, indicated that the sale of ICL to PotashCorp would not be in the best interest of the country. In a later statement the government did indicate it would be open to a formal bid.
    • Sources: Wall Street Journal; BusinessWeek; Fox Business
  • Rothschild aims to increase Berau interest
    • In response to Bakrie’s proposal to buy out Bumi plc, Nathan Rothschild, the company’s founder, is said to look for partners to make a counterbid for Berau’s Indonesian coal assets.
    • Bumi Resources and Berau are the two key asset groups of Bumi plc, the result of a deal between Vallar plc and Bumi. Following falling call prices minority shareholder Bakrie has proposed a deal in which it would buy Bumi plc’s assets and thus separate Rothschilds and Bakrie’s interests.
    • Sources: Wall Street Journal; Financial Times; Bloomberg

Trends & Implications:

  • The Israeli response that selling ICL would not be in the country’s interest might be preliminary. Although 60% of ICL’s mining activity takes place in Israel, centered around the Dead See, it is unlikely that PotashCorp would want to tune down those activities. Only a very small part of ICL’s production is actually sold in Israel, and those products could be seen as global commodities, making it hard for the government to justify a case in which a sale would be rejected based on national security. The issue that PotashCorp and Israel will need to figure out is how much overhead jobs to leave in the country and/or how to compensate for the potential loss of jobs in office activity (similar to the negotiations undertaken by BHP Billiton with the Canadian government when trying to acquire PotashCorp).
  • Rothschild’s attempt to find new partners to continue his Indonesian activities with Berau does not seem te be a step that is in the interest of shareholders. Entering in a bidding contest with Bakrie for the assets it already controls is not going to improve the financial position of a company plagued by dropping commodity prices. If Bakrie actually manages to secure the funds required to execute the buy-out proposal it is likely that Rothschild will be able to find other, less politically sensitive, cheaper assets to work with. Whatever the result of this power struggle, it appears that Bakrie and Rothschild will not continue to own stakes of the same company.

2012 | Wilfred Visser | thebusinessofmining.com

BHP Billiton and Rio Tinto growing in potash

October 6, 2011 Comments off

“Rio Tinto, the Anglo-Australian mining group, is re-entering the potash business through a joint venture with a Russian fertiliser producer which holds extensive exploration permits in the Canadian province of Saskatchewan.

Rio will initially acquire a 40 per cent stake in nine blocks covering an area of 241,000 hectares currently held by North Atlantic Potash, a subsidiary of Russia’s JSC Acron. Under the deal, Rio can eventually raise its stake as high as 80 per cent.”

Source: Financial Times, September 28 2011

“Mining heavyweight BHP Billiton is “aggressively” pursuing potash projects in Saskatchewan along with its Jansen asset, the company said on Wednesday.

“Although these are at an early stage, the data acquired suggests they have the ability to support significant potential developments,” spokesperson Ruban Yogarajah said, adding that the combined properties could “at least” match Jansen’s planned output of eight-million tons a year.

BHP Billiton in June said it approved a further $488-million to develop Jansen, bringing its total investment in the project to $1.2-billion.”

Source: Mining Weekly, September 29 2011

Observations:

  • Approx. 33mln tons of potash are mined annually, with Canada accounting for approx. 30% of global production. With price per ton of around $400-$500 the global market totals $13-17bln annually.
  • Both BHP Billiton and Rio Tinto are planning to move or expand in the Potash industry. BHP Billiton already is operating in Saskatchewan and tried to make a big move by taking over PotashCorp last year. Rio Tinto sold its potash exploration projects in 2009, but tries to re-enter in a JV with a small Russian player.

Implications:

  • The potash market it currently dominated by 2 marketing ‘cartels’: Canpotex (PotashCorp, Mosaic, Agrium) and BPC (Belarusian Potash Company: Silvinit & Uralkali), which control close to three quarters of global sales and typically copy each others pricing agreements with large customers. The rise of the large diversified players in the business (apart from BHP and Rio, Vale is also building its potash business) could break the power of these cartels and might move the market to pricing based more on spot prices.
  • From a technology and production standpoint it makes a lot of sense to have diversified mining companies, specialized in running large scale extraction projects, operate potash mines. Only on the marketing and sales side of the business synergies will be hard to realize, but companies like BHP and Rio Tinto have the experience and size required to set up a strong marketing presence.

©2011 | Wilfred Visser | thebusinessofmining.com

Vale reports record full year financials

February 28, 2011 Comments off

“Vale, the world’s largest iron ore miner, reported record net profit for last year as demand remained strong in China and nickel volumes recovered. The company on Thursday said it earned net profit of $17.26bn in 2010, more than three times what it made a year earlier, as sales reached $46.48bn, nearly double the $23.94bn of revenue in 2009.

Asia accounted for more than 53 per cent of operating revenue, with China contributing more than 33 per cent and Japan 11 per cent.”

Source: Financial Times, February 25 2011

Observations:

  • Revenue for 2010 is 21% higher than the previous record of 2008. EBIT, EBITDA and Net Earnings are up over 30% since 2008 as the EBITDA margin increased by 6%, mainly driven by higher iron ore prices. Earnings per Share of $3.25 are on the top side of analyst expectations.
  • The company is working on iron ore expansion projects in Carajás (Northern Brazil) and the new Simandou deposit in Guinea. Apolo (Brazil’s Southeast system) and Carajás Serra Sul are further down the line of expanding production, planned to be delivered in 2014. Ferrous minerals accounted for 92% of adjusted EBIT over 2010, showing the company’s large dependence on iron ore prices.
  • Expansion for non-ferrous commodities mainly takes place outside Brazil: Mozambique’s Moatize coal project; Zambia’s Konkola North copper project; Argentina’s Rio Colorado fertilizer project; and Peru’s Bayovar fertilizer expansion signify the increasing international presence of the company.

Implications:

  • The improved gross margin of the company does not indicate it has costs under control, but mainly that prices were higher. Vale did not suffer from exchange rate fluctuations as much as its peers as most of its costs are incurred in currencies linked to the dollar, but it mentions cost pressures in the areas of depreciation (resulting from expansion of the equipment fleet) and in procurement.
  • Cash position of $10bln at the end of 2010 and the outlook to beat last year’s cash flow from operations of $20bln in 2011 gives Agnelli a lot of flexibility in expanding. Vale will have to use the pile of cash to build a sustainable position among the supermajors even if iron ore prices come down. As the senior management indicates no major acquisitions will be done, the company will focus on organic growth (33 projects to be delivered by 2015) to achieve this objective.
  • When presenting the results no mention was made of election of a new CEO for Vale. Reelection of Roger Agnelli when his current term ends in March is not fully certain as tensions with the government are mentioned. Henrique Meirelles, Brazil’s former central bank governor, and base metals chief Tito Botelho Martins would be potential candidates to succeed him. The decision will have to be made by the powers behind Vale: the Brazilian government, Pension fund Previ and Banco Bradesco, and Mitsui.

©2011 | Wilfred Visser | thebusinessofmining.com

Technological Risk in Mining: Biotech replacing Potash?

December 3, 2010 Comments off

“Researchers conducting tests in the harsh environment of Mono Lake in California have discovered the first known microorganism on Earth able to thrive and reproduce using the toxic chemical arsenic. The microorganism substitutes arsenic for phosphorus in its cell components.”

“If this bacterium can exist without phosphorus, it’s possible we could create new kinds of fertilizers as phosphorus continues to run out on this planet. Scientists have been searching for a synthetic alternative to phosphorus-based fertilizer, the basis for modern agriculture, so far with little luck. It’s also possible that we now have a new tool to battle toxic arsenic dumps: new organisms that could incorporate all that poison into their genetic structure. Pretty clever creatures, all and all.”

Source: NASA; TBD.com, December 3 2010

Observations:

  • A new type of bacteria found by NASA is said to open new areas of research that could potentially lead to alternative forms of (biotechnological) fertilizer. However, during the press conference the scientists stressed that these potential applications should be regarded as long term opportunities.
  • During the press conference by NASA in which the discovery and the potential applications were revealed the shareprice of PotashCorp of Saskatchewan, supplier of raw material to the fertilizer industry, dropped by over 1%.
  • Drop of PotashCorp share price during NASA's press conference

Implications:

  • This invention is a good example of the technological risk the mining industry is facing. Technological innovations could either result in completely new methods of production or make the mining of certain minerals redundant (e.g. by providing other sources of fertilizer, replacing applications of aluminium by polymers).
  • PotashCorp did not mention any risk in this area in its annual report. It is hard to believe for most people in the conservative mining industry that anything might radically change the business environment.
  • In some cases the mining industry will have to redefine the purpose of the business. Is PotashCorp mining potash, or is it providing the world with fertilizer? What business are they in? And will it be possible to shift to radically new technologies? The oil business is facing similar questions regarding renewable energy technologies.

©2010 | Wilfred Visser | thebusinessofmining.com

Canada rejects BHP bid for Potash

November 4, 2010 Comments off

“Canada has rejected BHP Billiton’s $39bn bid for PotashCorp, dealing a potentially fatal blow to the Australian miner’s 10-week pursuit of the Saskatchewan-based fertiliser producer.”

Source: Financial Times, November 4 2010

Observations:

  • The acquisition has been rejected because of unclear benefit to the country. BHP has 30 days convince the government of the net benefit for Canada of the transaction.
  • The main issue for the Canadian provinces is the prospect of reduced tax revenues. Additionally, the government will require additional certainty about the security of jobs.

Implications:

  • The rejection should not be interpreted as a final decision, but rather as a logical way of pressuring BHP Billiton to be more generous to the Canadian government in conceding securities. The company will most likely come with a counteroffer that is hard to reject with the argument of negative ‘net benefit’.
  • If the company manages to convince the government, it still has to persuade shareholders to sell the shares. Most likely it will have to increase the price by approx. 10 percent to gain enough support. However, the actions of other parties like Sinochem and Phosagro might force the company to back off, as a bid above $150 could not be explained to BHP’s shareholders.

©2010 | Wilfred Visser | thebusinessofmining.com

Canada Splits on Foreign Bid for Potash

November 2, 2010 Comments off

“Canada’s impending decision on the fate of Potash Corp. of Saskatchewan has ignited a fierce national debate in a country known for its championship of free trade and laissez-faire attitude toward foreign takeovers.

Politicians from a wide spectrum are saying the government should not only veto the proposed sale of Potash to Anglo-Australian miner BHP Billiton, but also re-examine how Canada handles natural resources and foreign investment generally.

Some observers say that in its broadest sense, the debate reflects a much-needed discussion on how Canada should oversee the natural resources—such as oil and uranium—on which its economy is so dependent. Others say the disagreement highlights a dangerous wave of protectionism and nationalism fed by the global economic downturn.”

Source: Wall Street Journal, November 1 2010

Observations:

  • The main reason for the provinces to resist the acquisition is the loss of tax revenue, estimated to be $5bln over the next 10 years.

Implications:

  • A secondary argument used by the provinces is that BHP Billiton would gain a too large share of the market by the acquisition. However, as BHP doesn’t currently own a significant fertilizer business, this argument doesn’t hold for regulators. Furthermore, the potential changes to the pricing system that BHP would like to introduce would promote free trade rather than keep the current cartel system (from which the provinces are benefiting) in place.
  • Rumors of an increase of the bid by 10% in order to win over the required threshold of investors were smothered by other rumors that BHP would not increase its bid before the Canadian government would give its approval to the deal. In this way BHP manages to increase the pressure on the government via the shareholders of PotashCorp, that would get a good deal.
  • Most likely Harper will try to find a compromise by giving a conditional approval, with conditions including job security and arrangements to secure income for the provinces. In this way he will be able to defend the acquisition to the political audience while not setting international markets up against Canada.

©2010 | Wilfred Visser | thebusinessofmining.com

Sinochem in push to foil BHP’s Potash plan

September 9, 2010 Comments off

“Sinochem, the Chinese state-owned chemicals group, is trying to recruit at least one sovereign wealth fund and a Canadian pension fund for a consortium to block BHP Billiton’s $39bn hostile takeover of PotashCorp of Canada.

People familiar with the discussions said Temasek, the Singapore state investment agency, had been approached to join the consortium, along with several Canadian pension funds, including Alberta Investment Management, a pension fund with $66bn under management.”

Source: Financial Times, September 8, 2010

Observations:

  • Sinochem is reported to try to form a consortium to buy a strategic stake of PotashCorp to prevent BHP Billiton from acquiring the company. The Chinese company, backed by the Chinese government, is said to be afraid the targeted position of BHP would decrease stability of the fertilizer supply to China, which is crucial for the food security in the country.

Implications:

  • Chinese firms appear to use the strategy of buying 10-20% stakes of companies that are about to be acquired in order to prevent the acquisition in case the deal is thought to be harmful to Chinese interests. Using this “divide and conquer”-strategy, Chinese firms try to limit the negotiation power of their suppliers.
  • The advantage of state-controlled Chinese firms is the availability of large amounts of cash and the support of development banks, which helps companies like Chinalco and Sinochem to buy strategic stakes in suppliers. Clearly, the pockets of Sinochem are not deep enough to prevent the acquisition without help from other parties.

©2010 | Wilfred Visser | thebusinessofmining.com

Top 10 Priorities of Vale’s CEO Roger Agnelli

September 2, 2010 2 comments

Roger Agnelli

What are the things the CEO of the world’s second largest mining company is worried about? What is Vale’s CEO Roger Agnelli doing to catch up with BHP Billiton? What is on top of his “To Do”-list?

An analysis of Vale’s latest annual and financial reports, investor presentations and the news about the company in the last months yields a list of 10 issues that are likely to be at the top of Agnelli’ list of priorities.

The list holds strategic, operational, financial and relational activities, each of which are scored in terms of importance and urgency. Priority 1 on the list is trying to prevent BHP’s acquisition of PotashCorp. Priority 10 is managing breakthrough innovation of copper processing in Carajás. Read on for the full list of priorities.

1. Assess opportunities to prevent BHP Billiton’s PotashCorp acquisition

BHP Billiton has made a hostile $39bln acquisition offer for PotashCorp, thus following Vale’s move of entering the potash business as a diversified miner. However, the potential changes to the market and to potash pricing (currently controlled by regional cartels) are likely to make Vale’s potash assets uncompetitive. Although the company has denied being in talks with PotashCorp to find alternatives, Agnelli will certainly devote a large portion of his time to finding a response to BHP’s offer.

2. Manage integration programs to reduce costs

Vale has grown rapidly partly because of a large number of acquisitions. Insiders comment that many of the acquired companies have never been integrated completely, creating operational inefficiencies and a lack of corporate culture. To sustain growth, Agnelli will be working hard on realizing the synergies from acquisitions by building global businesses. Part of this assignment is the carve-out of the aluminium business, which has been sold to Norsk Hydro this year.

3. Anticipate on Brazilian election results

Brazil will elect a new president, senate and governors on October 3rd 2010. Both economic policy and environmental policy on federal and state level could be impacted significantly by election results. Agnelli is certainly developing scenarios to react on post-election regulatory changes.

4. Study increase of gearing in order to accelerate growth

The company has traditionally grown by M&A, but is currently guarding its gearing carefully. However, in order to enable further acquisitions, Agnelli will be discussing increasing the gearing and accessing debt with the new CFO Cavalcanti, who took over from Fabio Barbosa at the end of June, and banking partners.

5. Compete for position in China

Compared to BHP Billiton and Rio Tinto, transportation distance poses a disadvantage to Vale in supplying iron ore to China. While Rio Tinto is creating strong ties with Chinese government via its partnerships with Chinalco, Vale will need to find alternative ways to improve relationships with clients and government in the country that is responsible for most of the growth in demand of its products.

6. Manage development of Guinean iron ore deposits

An important part of the growth of the iron ore production in the next decade should be coming from Guinea, where Vale will develop the Simandou South deposit. Vale will need to get infrastructure in place and start development soon in order to please the government, which recently took development rights away from Rio Tinto because the company was not proceeding fast enough.

7. Reduce iron dependence

Growing the copper business unit and building a fertilizer business are two of the ways in which Vale tries to reduce its dependence on iron ore. Although the iron ore business is a star business with solid growth perspectives, the volatility caused by the dependence on one single commodity will worry Agnelli. Diversification into other business units is crucial for the long-term stability of the company.

8. Gain access to coal in Latin America

Although a lot of iron ore is shipped to China, Brazil is booming too. In order to produce steel for the domestic market, Vale needs to develop coal capacity in Latin America, which will require strategic acquisitions and targeted exploration.

9. Manage employee relations after Vale Inco strike

The board will need to prevent repetition of strikes like they experienced at Vale Inco during the last two years in Canada. Reviewing and improving international employee relations is both crucial for the company’s productivity and to improve the image in labor market, where Vale still has difficulties to attract international management talent.

10. Manage technological processing innovation for copper in Carajás

The company is trying to scale hydrometallurgical copper processing technology to commercial level in the Carajás UHC plant. Success in this project would have significant profit impact and would position Vale with the current deposits in development as one of the most competitive copper producers globally.

Sources: Vale annual report 2009, Vale summary review 2009, Vale investor presentation February 2010

BHP faces potash cartel backlash

August 27, 2010 Comments off

“Mosaic and Agrium, the partners of PotashCorp in Canada’s fertiliser cartel, have launched a campaign defending the industry’s pricing and marketing arrangements in a move that could impede BHP Billiton’s $39bn takeover bid for PotashCorp.

BHP has signalled it plans to use infrastructure such as port and rail facilities that belong to Canpotex, the cartel that comprises PotashCorp, US-based Mosaic and Agrium of Canada. “

Source: Financial Times, August 26, 2010

Observations:

  • The fertiliser cartel, which controls 70% of the global market in cooperation with the Russian cartel and PhosChem, is currently regulating supply in order to keep stable, high prices.
  • BHP is planning to operate PotashCorp’s mines at full capacity and has also indicated it wants to move the fertiliser market to a day-based pricing system.

Implications:

  • BHP will have to play according to the rules of the cartel at least in the first years after the acquisition (if it succeeds). The cartel shares logistical assets that are crucial for the Saskatchewan operations to operate at low costs. Breaking the rules of the game would seriously impede BHP’s access to these assets.
  • BHP’s incentive to break the rules of the game are grounded in the production cost curve. Lowering the global price would force many small operators (including Vale) out of business.
  • The move of BHP into the phosphate business will force the high cost suppliers to lower cost. This is the main reason various players are trying to prevent the acquisition from happening.

©2010 | Wilfred Visser | thebusinessofmining.com

BHP turns hostile with $39bn Potash bid

August 23, 2010 Comments off

“BHP Billiton launched a hostile bid for PotashCorp on Wednesday, ignoring cries of undervaluation from the Canadian fertiliser group’s executives, as the mining company took its $39bn offer directly to shareholders.

Analysts and investors expect the bid to rise, despite the claim of Marius Kloppers, BHP chief executive, that the $130 per share offer was full and fair. ‘The investors are saying that $160 per share is the level at which they start listening,’ said a US mining analyst.

In the biggest bid of the year, there was no hint last night of any competitors coming forward with rival offers that would drive the price immediately higher. By opening its move at nearly $40bn, BHP erected financial barriers to entry that are insurmountable to all but a handful of global miners such as Rio Tinto, Vale, Aluminum Corp of China or Xstrata.”

Source: Financial Times, August 18, 2010

Observations:

  • BHP Billiton offers $39bln in cash. As the company has only $9bln in cash, over $30bln has to be borrowed. This will double the debt load of the company. Goodwill on the balance sheet of the new company will increase by $26bln.
  • Analysts suggest BHP might increase its offer to $150 per share. At a higher price, developing its own potash mines would be cheaper. Current share price of $149.7 supports this analysis. Potential synergies would allow a premium of close to 60% to pre-offer share price.

Implications:

  • Rio Tinto executives can relax if the deal is closed. Spending $39bln or more on PotashCorp signifies Marius Kloppers deems a take-over of Rio Tinto no longer feasible.
  • Vale and Sinochem have approached PotashCorp in order to assess opportunities of collaboration that would pursuade the shareholders not to sell their shares to BHP Billiton. Especially Vale, which is building its own fertilizer business, would clearly benefit from any deal it could strike with the distressed management of PotashCorp.
  • The strong move of BHP into potash demonstrates the material is becoming mainstream for diversified mining houses. For a long time, potash mining has been regarded a separate business. PWC included potash miners in its yearly analysis of the mining industry this year for the first time. With Vale and BHP Billiton holding a strong stake in the industry, more diversified miners might start looking for potash deals.

©2010 | Wilfred Visser | thebusinessofmining.com