Archive
Xstrata retains leadership in Dow Jones Sustainability Index
“The main sustainability issue facing the mining industry is that of declining ore grades, which implies that over time, more mineral ore needs to be extracted and processed in order to produce the same amount of metal. This is likely to exacerbate many of the environmental and social issues facing the mining & metals industry going forward. Some of the prominent environmental issues include mineral waste management, as well as the management of key inputs such as energy and water. Social issues are mainly centered around the health & safety of workers and general labor conditions. Issues such as land rights, population relocations, the use of private security forces to protect mining assets, and mine closure also remain very controversial. As with other extractive industries, the mining space is particularly susceptible to corruption, bribery and other breaches of the Codes of Conduct”
Source: Dow Jones Sustainability Index Review 2011, September 2011
Observations:
- Xstrata tops the Dow Jones Sustainability Index for the basic resources sector for the second year in a row.
- Most important changes of the index for the mining industry are the inclusion of Newcrest and Kinross, and the removal from the index of ArcelorMittal and Goldcorp.
- Assessment criteria include economic, environmental, and social topics. Full list of criteria can be found here.
Implications:
- Inclusion in the DJSI is mainly a marketing issue; it does not have direct operational or financial consequences. Many countries do require foreign investors to adhere to global reporting initiatives to ensure a certain level of sustainability, but DSJI requires a much broader set of policies.
- Xstrata especially scores higher than industry average in terms of climate strategy, mineral waste management, human capital development, and standards for suppliers. The benchmark report will certainly be used by some companies to prioritize areas for improvement.
©2011 | Wilfred Visser | thebusinessofmining.com
Is BHP Billiton too big to grow?
The (provisional) refusal of the Canadian government to let BHP Billiton acquire PotashCorp of Saskatchewan is the third regulatory limitation to growth the company faces in a short period. As regulators around the world are afraid the company gains a dominant position in mineral markets, what options does the CEO, Marius Kloppers, have left to grow the company?
Observations:
- In February 2008, shortly after mr. Kloppers took over as CEO, BHP did a hostile takeover bid for its largest rival: Rio Tinto. The offer, worth approx. $165bln, was withdrawn in November 2008 after regulators indicated the deal would not gain anti-trust approval and the access to debt dried up in the capital markets.
- After the failed acquisition, the two companies agreed to try to realize a significant part of the synergies the merger would have created by setting up a Joint Venture to develop the Pilbara iron ore deposit in Western Australia. However, after both Australian and European regulators indicated this would create an iron ore player that would be too dominant, the plans were cancelled last month.
- The $39bln offer for PotashCorp appears to be a move in which BHP Billiton does not build up a dominant position in any market. If BHP manages to break the cartel-based pricing system for potash the deal might actually benefit the world economy. Still the Canadian government seems to be inclined to let the deal stall to protect the domestic industry and tax revenues.
Implications:
- BHP Billiton has approx. $12bln cash on the balance sheet and is earning more cash rapidly due to the high iron ore price. Typically mining companies need approx. 2-3% of asset value in operating cash, leaving BHP with some $10bln excess cash. The low leverage and the high credit rating of the company enable it to raise at least $30bln additional cash by increasing debt. However, it is hard to select acquisition targets that might actually lead to a combination that will be approved by regulators.
- The company will either need to focus on acquiring large players in markets where it does not have a strong presence yet, or focus on acquiring many smaller players or individual assets. As the company is trying to reduce the portfolio complexity, expansion into completely new markets is unlikely. Potential acquisition targets might be Newmont, Goldcorp, Freeport-McMoran or Eldorado in the gold market and Eramet, Inmet Mining and Outokumpo in the base metal market. Expansion into the industrial minerals sector would also be an option.
- The best way for mr. Kloppers to make a name for himself would be to make BHP Billiton the first major western mining company to build up a strong operating presence in China and/or India. Creating a Joint Venture with a local player might be the best option to achieve this.
©2010 | Wilfred Visser | thebusinessofmining.com
Andean Subject of Gold Major Bidding War
“One of the world’s most prospective gold companies, Andean Resources Ltd., has become the subject of a bidding war between two Vancouver-based global gold majors. Andean, based in Australia, has rocketed to international industry prominence in the past two years through the rapid development of its high-grade, low-cost Cerro Negro gold project in Argentina.
Goldcorp Inc. and Andean said Friday they had reached an agreement for Goldcorp to acquire all Andean shares through a combination of shares or cash that values Andean at 3.6 billion Canadian dollars (US$3.4 billion). Under this arrangement, each common share of Andean will be exchanged for either 0.14 shares of Goldcorp or a cash payment of C$6.50/share, subject to an aggregate maximum cash consideration of C$1 billion. “
Source: Wall Street Journal, September 3, 2010
Observations:
- Cerro Negro contains 2.1 million ounces of gold and 20.6 million ounces of silver in probable reserves. At capacity of 285 thousand ounces this will result in a mine life of only 7 years.
- Average cost of production is projected to be $60 per ounce, resulting in a production margin of over 90%.
- Goldcorp currently offers $3.4bln, while Eldorado’s offer priced about 2% lower was rejected 2 weeks ago. Eldorado has made a new offer today.
Implications:
- Goldcorps shares dropped slightly less than Eldorado shares upon the offers, indicating investors believe Goldcorp to be able to achieve more synergies. Although Eldorado is growing fast and building a strong portfolio of assets, the geographic and operational variance between the projects hinders the realization of synergies.
- The gold business is experiencing a boom and a strong increase in M&A activity due to the high price levels. Exploration costs for gold deposits account for nearly half of the total global exploration costs.
©2010 | Wilfred Visser | thebusinessofmining.com
Top Miner’s M&A History
Gold Miner’s M&A History
