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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 Week 42/’12: South Africa strikes; Glenstrate voting scheme

October 8, 2012 Comments off

Top Stories of the Week:

  • South African strikes spread; workers fired
    • Illegal (wildcat) strikes in South Africa have spread to more or less all major miners in the country. Anglo American’s Kumba iron ore and platinum operations are faced with production disruptions, as are Xstrata, GoldFields, Anglogold, and most other major mining houses in the country.
    • South African strikes escalated when police shot down Lonmin strikers. After Lonmin agreed to a 22% wage increase workers in other companies demanded similar increases, bypassing the traditional unions. Several companies are trying to set up structured wage discussions to come to a collective agreement.
    • AngloAmerican’s Amplats decided to fire 12 thousand striking workers, which is a fifth of its total workforce.
    • Sources: Anglo American press releases1 2; Financial Times 2; wall Street Journal
  • Xstrata board recommends Glenstrata deal and complicates voting
    • Xstrata’s board of directors issues advice for the company shareholders to accept the merger proposal to form Glenstrata. The voting structure has been set up to assess support for a deal both with and without an extensive retention package for Xstrata’s top management.
    • Shareholders will vote first on the merger proposal both including and excluding the retention package, requiring a 75% majority excluding Glencore’s votes. Then the vote on the retention package will be done separately, requiring only a 50% majority of votes.
    • Sources: BusinessWeek; Financial Times

Trends & Implications:

  • The voting scheme is set up by Xstrata’s board to have a safety net for the deal in case the shareholders don’t accept the management retention package. The Qatari sovereign wealth fund is the largest shareholder that can vote on the merger deal; it has not voiced its opinion on the improved Glencore offer and on the management incentives, but insiders indicate the group considers retention of Xstrata’s officers a key priority. Key unknown in the voting mechanism is whether or not the results of the first two questions (on the merger) are made public before the 3rd vote on the retention scheme.
  • The unrest in South Africa is much wider than the mining industry, and as such requires solutions that are much broader than the industry. In the short term a large part of the workers might return to work with a significant increase in wages as demonstrated in the Lonmin case. However, as long as this increase does not span across the industry the workers that have not been given a raise will turn to strikes to stress their demands. The mining houses will have to work nationwide to find a sustainable solution for the industry, which is hard because South African miners operate on the high end of the global cost structure for many commodities. The task is even harder when taking in account that social unrest will continue as long as the issues in related and supplying industries continue.

2012 | Wilfred Visser | thebusinessofmining.com

Strike Begins at Freeport Indonesia

September 16, 2011 Comments off

“Freeport-McMoRan Copper & Gold Inc.’s Indonesia unit suspended mining operations at its Grasberg mine in West Papua on Thursday, as workers started a strike that could last a month, a labor union spokesman said. ‘All of the mining operations, except for the public facilities, are shut down,’ Juli Parrorongan told Dow Jones Newswires in a text message. All workers at the mine are participating in the strike, which will last until Oct. 15 if the company refuses their demand for higher pay, Mr. Parrorongan said.

Freeport suspended operations during a weeklong strike at Grasberg in July and lost about 35 million pounds of copper and 60,000 ounces of gold output. ‘We are disappointed that union workers decided to implement an illegal work stoppage,’ PT Freeport Indonesia, which is 90.64% owned by Freeport-McMoRan, said in a statement. The company said that since July 20, it ‘has negotiated in a diligent good-faith manner’ with the union toward a collective labor agreement to cover 2011-13.”

Source: Wall Street Journal, September 15 2011

Observations:

  • Grasberg forecasted 2011 total mine sales of 1 billion pounds of copper and 1.3 million troy ounces of gold, representing approximately 3.1% of global copper production and 1.5% of global gold production.
  • Current negotiations started after an 8-day strike in July. Freeport offers a 22% wage increase over 2 years, but unions demand an increase of salaries by more than 100%.

Implications:

  • Copper price has been relatively stable for the year to date, but the news of the strike at Grasberg coincides with reports of falling production in Chile and increased buying by Chinese traders, potentially leading to a new price rally.
  • Several analysts still expect a modest global copper supply increase for the year. However, if strikes spread to other mines supply for the year might actually decrease for the first time in about a decade. Global production has almost doubled in the past 20 years, only experiencing a short stabilization in 2002-2003.

©2011 | Wilfred Visser | thebusinessofmining.com

Antofagasta Raises Dividend

August 24, 2011 Comments off

“Chilean miner Antofagasta PLC on Tuesday doubled its interim dividend after reporting a 54% rise in first-half net profit due to higher average commodity prices and volumes. Chief Executive Marcelo Awad said the miner remains well positioned to deal with commodity-price volatility and relatively strong cost pressures given its low average net-cost position. …

Antofagasta expects global copper output to fall 500,000 tons short of demand this year and forecasts prices to average more than $4.20 a pound in the second half. This compares with $4 a pound in mid-August and a record average $4.26 a pound for a calendar half-year in the first half. Antofagasta reported an 84% rise in first-half earnings before interest, taxes, depreciation and amortization, or Ebitda, to $1.95 billion. Net profit rose 54% from a year earlier to $696.2 million, while the declared interim dividend rose to $0.08 a share from $0.04 a share in the same period a year ago.”

Source: Wall Street Journal, August 23 2011

Observations:

  • Antofagasta mainly operates in Chile. The key growth project is the ‘Esperanza’ project close to the operating ‘El Tesoro’ mine. Exploration in Peru, USA, Australia and Pakistan signals the ambition to expand internationally.
  • The company is controlled by the Luksic family, which holds approx. 65% of the shares.

Implications:

  • Antofagasta appears not to be affected by the strikes that stopped production in other mines in the region, signalling a good relationship of the management with the unions.
  • The payout ratio of 11% of profits is above expectations, but below the 35% benchmark the company adheres to. The management is either hoarding cash for a significant investment or is planning to announce a special dividend at the end of the year. Last year a special dividend of 100% was turned out at year end.

©2011 | Wilfred Visser | thebusinessofmining.com

Newcrest Profit Soars 63%

August 15, 2011 Comments off

“Newcrest Mining Ltd., the world’s third-largest gold miner by market value, said Monday its fiscal full-year net profit rose 63% to 908 million Australian dollars ($940.1 million), as production jumped on its acquisition of Lihir Gold Ltd. and the price of gold soared.

‘The world economic and political issues are supporting a very strong gold price going forward,’ Chief Executive Greg Robinson said in a conference call. He didn’t provide a specific price forecast. The surging gold price, which averaged A$1,409 per troy ounce over the company’s fourth quarter ended June 30 and has since hit successive records up to $1,814.89 per ounce, helped lift earnings at the Melbourne-based company from A$556.9 million the previous year.

On the underlying basis preferred by equity analysts, which excludes one-off and accounting items, net profit came to A$1.06 billion in the financial year, the company said in preliminary annual results. Analysts had suggested an average figure of A$1.05 billion.”

Source: Wall Street Journal, August 15 2011

Observations:

  • Newcrest is the world’s 6th-largest producer of gold, producing approx. 2.5bln ounces in 2010. About a quarter of the production comes from Western Australia’s Telfer mine.
  • A 43% increase in production volume results in 76% higher employee salaries and 87% higher maintenance and contract labour, showing the cost pressures that have led to the current $513/oz production costs.

Implications:

  • Newcrest is working on the integration of Lihir, bought a year ago for $8bln. The lower grade deposits the company is developing change the cost structure of the company and reduce its historically high profit margin. As a result the company will become more similar to large rivals Barrick and Newmont.
  • High gold prices drive gold miners to pay out large dividends, trying to convince investors of the benefits of holding gold miner shares rather than gold ETFs.

©2011 | Wilfred Visser | thebusinessofmining.com

Freeport confident of copper boom

July 25, 2011 Comments off

“Freeport McMoran, the world’s biggest publicly traded copper producer, has predicted strong markets that could push its cash flow as high as $9bn this year compared with $6.3bn in 2010. The financial strength of Freeport, which declared a special dividend last year to clear excess cash, reflected even higher demand for copper and gold this year than last.

Richard Adkerson, Freeport’s chief executive, said destocking of copper inventories in China was helping to support the copper price. He noted China’s efforts to cool the economy but said: ‘There is a tremendous amount of spending on infrastructure and housing. China has the financial resources to continue to invest in the face of global economic conditions.’”

Source: Financial Times, July 21 2011

Observations:

  • Freeport says it is spending money as aggressively as possible to expand (planning to spend $2.6bln on capex this year), but still this year’s gold production is forecasted to be lower than last year’s output while copper output is increasing marginally.
  • Mr. Adkerson mentions rising input costs, caused by high demand, as the key issue the industry will face over the coming years.

Implications:

  • The industry is facing rising input costs for fuel, power, labour & equipment while average grades of many flagship operations are falling. As a result both mining and processing costs per unit of product increase rapidly, supporting high commodity prices.
  • Mining contractors and equipment manufacturers are faring well as mining companies face resource shortages (Caterpillar announced a 44% increase in profits this week). Miners are forced to pay high prices and book equipment and contracted services months in advance because of global shortages.

©2011 | Wilfred Visser | thebusinessofmining.com

Polyus set for listing after Kazakh progress

June 24, 2011 Comments off

“Polyus Gold, Russia’s largest gold producer, is poised to come to the London market after a long-delayed merger with Kazakhgold appeared resolved on Friday. The deal, which carries a nominal share-swap value of $13.1bn (£8bn), would create the largest gold miner on the London market in production terms.

Polyus, which has controlled Kazakhgold since 2009, proposed a reverse takeover last year. Polyus was to be bought by its smaller, majority-owned subsidiary, in order to gain access to Kazakhgold’s London listing.”

Source: Financial Times, June 18 2011

Observations:

  • Polyus Gold reached gold production of 1.4Moz last year, which is over 20% of total Russian production and close to 2% of global production. The company operates 9 mines and has 2 development projects at present. Reserves of 78Moz place the company among the gold miners with the largest potential globally.
  • Polyus will get access to the London Stock Exchange by merging with Kazakhgold, which already is listed in London.

Implications:

  • The deal is an example of the trend of Russian miners pursuing a listing on western stock markets (especially London) to enable western investors to invest and make it easier to raise capital for the range of development projects to be undertaken in Russia.
  • Secondary reason to pursue a London listing mentioned by Polyus is the potential for ‘acquisition and consolidation in the industry’, as the listing makes it easier to execute both share-based and cash execute. As Polyus currently is not sitting on a huge war-chest the company will likely stick to organic growth and small acquisitions financed share issuance. Furthermore the company could look around for potential international buyers.

©2011 | Wilfred Visser | thebusinessofmining.com

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