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Posts Tagged ‘India’

Mining Week 46/’12: Lonmin vs. Xstrata & the CEO-carousel

November 10, 2012 Comments off

Top Stories of the Week:

  • Lonmin raises equity to stay independent
    • Lonmin announced a $800m rights offering, in that way fending of the proposal by Xstrata to increase its stake in the troubled platinum miner to a majority share.
    • The strikes in South Africa, which escalated at Lonmin’s operations, have caused significant lost production and urgent financial issues for Lonmin.
    • Sources: Lonmin press release; Financial Times; Wall Street Journal
  • BHP starts search for new CEO
    • BHP Billiton has started the search for the successor of CEO Marius Kloppers. Apparently the company will not necessarily promote an insider to the top position.
    • With Mick Davis leaving Xstrata if/when the merger with Glencore is approved and Cynthia Carroll leaving AngloAmerican next year, 3 of the top CEOs in the mining industry will change.
    • Sources: Financial Times 1; The Economist; Financial Times 2
  • India limits export of iron ore
    • Iron ore exports from the Indian state of Orissa will be limited strongly by new production quota for mines without processing facilities.
    • The government is trying to attract processing investment to prevent iron ore is only exported without significant benefit for the country. High export duties (raised to 30% early this year) and production quota are used to discourage exports from the world’s 3rd largest iron ore exporter.
    • Sources: Wall Street Journal; Commodity Online; Steel Orbis

Trends & Implications:

  • Orissa’s attempts to curb exports don’t do much to stimulate local investment in processing capacity. India’s government announced a year ago that it would make it more attractive for companies to invest by setting up mining right and process plant permitting packages. With the current uncertainty about both global demand and India’s local demand outlook it is unlikely that large investments in additional processing capacity will be made in Orissa in the near future. As a result the will mainly slow down the local economy.
  • Almost a year ago, after the announcement of Ferreira as new CEO of Vale, this blog conducted a poll among its readers to find out which top company CEO was mostly to be replaced first. The results showed most trust in the future of Kloppers at BHP. A year later 3 out of 4 are on their way out, while most CFOs have been replaced over the past 2 years too. The high level of activity in replacing top executives indicates a change of mindset in the boards of these companies: shifting from a focus on growth and investment to a focus on operational excellence and payout. The new group of top executives will mainly need to show a track record of cost-control and willingness to make tough decisions on closure of mines.

Results of Dec-2011 Poll on thebusinessofmining.com

2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 13/’12: Diamonds are not forever, neither are iron ore chiefs

March 31, 2012 Comments off

Top Stories of the Week:

  • Rio Tinto puts its diamond division up for sale
    • Rio Tinto started a ‘strategic review’ of its diamond business to explore divestment options for the 4 assets. The move comes only months after BHP Billiton announced it intends to sell its only diamond project.
    • Rio Tinto was seen as the most likely buyer of BHP’s Ekati project because of the close proximity to it’s Diavik operation.
    • Sources: Rio Tinto press release; Financial Times; Wall Street Journal
  • BHP Billiton iron ore president quits; replaced by insider
    • Ian Ashby, president of BHP Billiton’s iron ore division, announced he will step down in July. BHP will replace him with the head of the energy coal business: Jimmy Wilson.
    • The leadership change comes during an aggressive investment program to expand capacity of the Pilbara operations.
    • Sources: BHP Billiton press released; Wall Street Journal
  • Indian privatization of coal mines backfires
    • A leaked government report states that the Indian government missed out on $210bln by selling state owned coal assets to cheaply without having a proper auctioning mechanism in place.
    • The hedge fund TCI, which owns close to 2% of Coal India, has started a process to sue the management of Coal India for allowing too much government interference related to the sale of assets.
    • Sources: Financial Times; Times of India; Financial Times II

Trends & Implications:

  • In March of last year Rio Tinto was said to explore a partnership with Alrosa, the world’s second largest diamond miner. This cooperation never materialized, and it appears Rio Tinto’s management has decided the iron ore business does not fit in its strategy of running large scale operations of traded minerals. With the presence of DeBeers and Alrosa it is unlikely that a third player will be able to invest to buy both Rio Tinto’s and BHP Billiton’s operations.
  • India is one of the few mineral rich countries in the world that had to go through a large scale privatization program in the last years. Typically domestic investors who know the businesses and have access to influential officials manage to get good deals in buying assets (Russia is another good example). Often the real value of the formerly government owned assets only becomes apparent after a couple of years of operation in private hands.

©2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 08/’12: GlenStrata’s antitrust & an Indian giant

February 25, 2012 Comments off

Top Stories of the Week:

  • Glencore and Xstrata to seek merger approval in Brussels
    • Despite earlier statements that Xstrata and Glencore would not need to seek approval from the European Commission the parties have now decided to submit their case for approval in Brussels.
    • The companies argue that there is no significant increase in market domination because of the strong ties the companies already had prior to the merger.
    • The European Commission will now have to decide on the potential restrictions to the new company, such as the obligation to sell certain elements of the business. A market density index calculation is used to see whether or not the new company would have a too dominant position. The big uncertainty in this calculation is how the Commission will scope the market or markets the companies are active in.
    • Sources: Wall Street Journal; Financial Times; EU Merger Control Rules
  • Vedanta merges Indian assets to create Indian mining giant: Sesa Sterlite
    • Vedanta has decided to merge all its Indian assets, including Sesa, Sterlite, and Cairns India, into one big Indian company. This new Entity will be named Sesa Sterlite and will have a market capitalization of around $22bln. Vedanta will hold just under 60% of the shares.
    • Sources: Times of India; Economic Times; Vedanta presentation
  • Tavan Tolgoi plans to list in June
    • The Mongolian government plans to list a significant part of Tavan Tolgoi, a large coking coal project in the south of the country, in both London and Hong Kong this summer. Regulatory issues threaten to delay the HKEx listing.
    • The government plans to eventually hold 51% of the shares, give 20% to the population, sell some 10% to local business at a discount, and make the rest available to international investors. A significant part of the 20% given to the population might find its way to international investors.
    • Sources: Wall Street Journal; FOX Business

Trends & Implications:

  • The creation of Sesa Sterlite builds both a second diversified miner with a significant oil & gas business (next to BHP Billiton) and a second diversified miner with a significant interest in zinc (next to Glencore/Xstrata).
  • If Vedanta manages to both make the merger integration of the 7 or more individual companies a success and to manage its investments in other developing countries successfully, it creates the primary candidate to become the stable Indian mining giant. Growth of the Indian industry is phenomenal but faces many challenges. The mixture of a very strong Indian foothold with high growth assets in many other developing countries could prove to be a good basis for risk diversification.

©2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 46/’11: Hard times for emerging market multinationals

November 13, 2011 Comments off

Top Stories of the Week:

  • Vedanta reports disappointing results
    • Earnings of the industrial metals miner with many operations in India dropped despite revenue increase of 43% for the half year. Reduced earnings were caused by losses in the aluminium group and by a weak rupee (with 45% of revenue in India).
    • Sources: Vedanta results presentation; Financial Times; Wall Street Journal
  • Anglo and Codelco battle over Sur
    • Only days after Anglo agreed to pay $5.1bln for a 40% stake of De Beers, it decided to sell a stake of its Chilean Sur copper project to Mitsubishi for $5.4bln. The sale has led to disagreement with Codelco, which claims to hold an option on 49% of the total project, not just on Anglo’s share.
    • Sources: Anglo American press release; Financial Times; Wall Street Journal
  • Caterpillar chooses to produce in USA and Indonesia, buys into China

    Trends & Implications:

    • Though the results for Vedanta were not met with enthusiasm on the markets, they were in line with the strategy set out by the management in May: growth, long term value, and sustainability. Vedanta currently chooses to increase its market share instead of generating high profits, in the awareness that the current development will for a large part determine which companies will be the emerging market multinationals of the future.
    • The fight between Anglo and Codelco over the ownership stakes in the Chilean copper assets is flanked by a fight by Japanese co-investors and traders. Codelco sided with Mitsui to build its 49% stake at a low valuation, but Anglo found a way to get a higher price by selling part of the asset to rivaling keiretsu Mitsubishi.

    M&A overview update

    The M&A overview of the Business of Mining has been updated with Anglo’s 40% acquisition of De Beers.

    ©2011 | Wilfred Visser | thebusinessofmining.com

GVK Acquires Majority Stake in Hancock

September 19, 2011 Comments off

“The GVK group said Friday it has acquired a majority stake in the Hancock coal project in Queensland, Australia, for $1.26 billion to secure thermal coal supplies for its planned power plants in India. It has acquired a 79% stake in the two Alpha mines, 100% of the Kevin’s Corner mine, as well as full ownership of ongoing rail and port projects connecting the Hancock coal projects.

The Hancock group, led by billionaire Australian businesswoman Gina Rinehart, said in a separate statement that GVK will pay $500 million up-front and the rest in phases. It will pay $200 million one year after the deal closes, and $560 million on the financial close of the coal project, anticipated to be in 2012. The GVK group owns and operates power, airport and other infrastructure projects in India, most of them through its listed entity, GVK Power & Infrastructure Ltd.”

Source: Wall Street Journal, September 19 2011

Observations:

  • GVK secures long term access to at least 20mln tons of coal a year, approx. a quarter of the total planned production of Hancock coal.
  • GVK has coal power projects in India in Punjbab and Goindwal Sahib, and owns 2 small coal mining projects in the state of Jharkhand (Tokisud and Seregarha).

Implications:

  • Indian companies are increasingly looking abroad to secure coal access. Both thermal coal and metallurgical coal are in demand, as coal mining capacity does not keep up with high economic growth.
  • For Hancock the sale of the coal projects frees up cash to develop the current project further and to pursue other opportunities more aggressively. Next to Hancock coal the group is involved in the Hope Downs iron ore project and the Jacaranda Alliance Joint Venture.

©2011 | Wilfred Visser | thebusinessofmining.com

India and Australia strengthen environmental protection

August 31, 2011 Comments off

India Court Extends Karnataka Iron-Ore Mining Ban

“India’s Supreme Court has extended a ban on iron ore mining in two new districts in the southern state of Karnataka, a lawyer involved in the matter said Friday.

Panindra Rao, a lawyer representing the mining industry, told Dow Jones Newswires that a court-appointed body found prima facie evidence of environmental degradation in the districts of Tumkur and Chitradurg. ‘[The court] has stopped mining and transportation operations in Chitradurg and Tumkur districts,’ he said, adding that a panel has been asked to make a detailed environment impact study of these two districts.

The extension of the mining ban to two more Karnataka districts on lines of another imposed on July 29 in the key iron ore hub of Bellary is expected to hurt not only supplies to domestic mills, but also exports by the world’s third-largest iron ore supplier.”

Source: Wall Street Journal, August 31 2011

Australia’s West Kimberley Becomes Heritage Site

“Australia plans to protect its spectacular West Kimberley region from environmental degradation caused by mining and development. An area of wilderness bigger than England will be classified as a National Heritage site to help guard its rare attractions including 130 million-year-old dinosaur footprints.

Nicole Roocke, director of the Chamber of Minerals and Energy of Western Australia, said the ‘broad-brush approach’ would mean an additional bureaucratic burden for potential mining projects in the area. ‘It will impact negatively on all economic development in the Kimberley. It will compromise economic growth in communities in the Kimberley,’ Ms. Roocke said.”

Source: Wall Street Journal, August 26 2011

Observations:

  • The Indian district of Karnataka is responsible for approximately a quarter of India’s iron ore exports and a fulfills a significant part of domestic demand. Environmental degradation in the area is mainly caused by illegal and/or poorly controlled mining.
  • The key fight between industry groups and environmental lobbyists in Australia is about the development of a gas terminal for Woodside in the West Kimberley region. Industry groups are not happy because they will have to introduce tighter controls (although the developing partners do not see the introduction of the site as a stumbling block), while environmentalists see the introduction of a heritage site as useless if the development of the complex goes on.

Implications:

  • The current boom of the mining industry has encouraged governments around the world to put stricter environmental regulations in place, knowing that companies are willing to go a long way to be able to continue with their projects. While the main government interventions in India are around increase of government control and institutionalization of the industry, interventions in Australia, the US, and other OECD countries mainly focus on preserving specific areas or species.
  • The actions of the Australian government should partly be seen as a political move, countering the critics that the government has been too mining-friendly by watering down the super profits tax.

©2011 | Wilfred Visser | thebusinessofmining.com

Indonesia’s Indika to Expand Coal-Mining Capacity

June 15, 2011 Comments off

“Coal miner PT Indika Energy will expand capacity at least 25% in the next three years to meet the growing demand for fuel in expanding Asian economies, the company’s chief executive said. Indika plans to boost the capacity of the mines it controls through PT Kideco Jaya Angung to 50 million metric tons in the next two to three years from 40 million tons, said Arsjad Rasjid, Indika’s CEO and president director. The company hopes to lift capacity at least in part through acquisition.

The Jakarta-based company, which had revenue of around $440 million last year, is seeking to keep up with rising demand for thermal coal to fuel the power plants of India, China and in Indonesia. Indika is Indonesia’s third-largest coal miner, behind PT Adaro Energy and PT Bumi Resources.”

Source: Wall Street Journal, June 14 2011

Observations:

  • Indonesia is located close to China and India, both of which depend on thermal coal imports. At the same time the economic development in Indonesia (with over 240 million inhabitants) is driving the domestic demand. As a result the coal mining sector in the country is recently getting strong international attention.
  • The Indonesian coal mining industry was strongly reshuffled last year after Vallar combined the assets of domestic champions Bakrie and Bumi. Part of the this deal, which results in a FTSE-listed Bumi plc., is executed this week by Vallar issuing convertible bonds to Bumi resources.
  • Coal India is also looking to invest in Indonesian coal mines, using part of the funds raised through last year’s IPO, which had the company enter the global mining top 10 in terms of market capitalization.

Implications:

  • Indonesian coal reserves are rather small compared to Chinese and Indian reserves. With the strong rise of domestic demand it is foreseen that Indonesian exports are not going to be much higher than current levels. However, as most of the reserves are located on the island Kalimantan and demand is mainly on Java and Sumatra export facilities will be built anyway, linking the Indonesian market to the global seaborne coal market.
  • Indonesian government is trying to find a balance in regulating production and exports, looking at the conflicting perspectives of energy requirements for own development and income from coal exports. High export tariffs and/or production caps could possibly hurt the international investors.

©2011 | Wilfred Visser | thebusinessofmining.com

India in race to snap up coal assets

June 7, 2011 Comments off

“From the mining belts of Queensland, Australia, to East Kalimantan in Indonesia, Indian companies are racing to secure coal assets across the globe. Last year, Indian companies overtook those from China, Korea and Japan as the biggest Asian buyers of overseas coal assets. They were following their US counterparts in trying either to increase their exposure to coal at a time of high commodity prices or lock in fuel supplies for industries such as steelmaking.

Unable to guarantee access to supplies at home because of a mixture of bureaucracy, corruption, logistical and environmental issues, many Indian groups have been aggressively trying to buy assets in Indonesia and Australia. India signed $2.4bn of deals out of a global total of $16bn last year, according to Wood Mackenzie, the consultancy. Meanwhile, Indonesia’s coal association has said it expects India to surpass Japan as the leading buyer of the country’s coal.”

Source: Financial Times, June 6 2011

Observations:

  • According to Ernst & Young’s analysis of M&A in the mining industry over 2010 India has risen to the 7th place worldwide with $5.5bln overall acquisitions in the industry. A large part of India’s acquisitions are aimed at coal mines and transportation infrastructure.
  • Most Indian acquirers of coal assets are private utility-linked companies, which are mainly interested in thermal or energy coal assets.

Implications:

  • The gold-rush mentality of many new players and the resulting high premiums paid for coal assets will help the industry in India consolidate, as the more sophisticated players will soon outperform the players that pay too much for access to resources.
  • The Indian government is trying to mobilize state controlled companies to participate in the bidding for overseas coal assets. The creation of the ICVL consortium and the IPO of Coal India are aimed to create more coordination in government efforts.

©2011 | Wilfred Visser | thebusinessofmining.com

Coal India in Talks to Buy Stake in Indonesian Mines

May 27, 2011 Comments off

“Coal India, the world’s largest coal producer, may submit a final bid by the end of June to buy a stake in Indonesia’s PT Golden Energy Mines, a person with direct knowledge of the matter said. The state-run coal monopoly is currently doing due diligence of Golden Energy, said the person who declined to be named. Coal India brought out its initial public offer last year. ‘It is not a controlling stake,’ the person said, and didn’t provide more details. He said Coal India is yet to decide on a valuation for the stake it plans to purchase as a proposal is yet to be placed before the company’s board. ‘There are various proposals in countries like Indonesia, Australia, U.S., which Coal India keeps on evaluating,’ the person said.

Coal India, which contributes to more than 80% of the country’s coal needs, faces several obstacles in augmenting its output such as delays in environment clearances. To meet rising demand from consumers, mainly in the power sector, the company has been scouting for mining assets overseas. More than half of India’s power-generation capacity of 174.36 gigawatts is based on thermal coal. The country aims to add 163 GW of capacity in the decade through March 2017 and a major portion of the new capacity would also be dependent on fossil fuel. India, the world’s second-fastest growing economy in the world, faces shortage of coal as environmental concerns have delayed approvals for local mining, hurting production. The country is facing a shortage of 142 million tons of coal for the current year. Local production of coal is expected to be 554 million tons against demand for 696 million tons, according to government estimates.”

Source: Wall Street Journal, May 26 2011

Observations:

  • The rumors about a potential acquisition by Coal India were spread around the time of announcement of quarterly results. The company posted net income for the quarter of over $900mln.
  • A small part of the company was sold in an IPO last year, providing several billions of dollars to be used in overseas acquisitions and domestic expansion to fuel Indian demand for thermal coal. The government projects a shortfall over the next year of approx. 140mln tons, roughly a third of the total Coal India production for the year.

Implications:

  • Stepping up mine production in India is mainly hindered by slow environmental permitting processes. Part of the problem lies with the government’s inefficiency in running the permitting process, the other part of the problem lies with Coal India and other miners in the country that have not yet adapted to the increasing stringency of regulation.
  • Indonesia is growing into an important coal supplier to both India and China. The acquisition of Vallar of a series of assets and participations to form Bumi plc is just one example of the rising importance of the country. However, just as in India the environmental and social regulations in Indonesia are being strengthened, which might slow down the development of coal production in the country.

©2011 | Wilfred Visser | thebusinessofmining.com

Tata Steel Profit Increases by 72%

May 26, 2011 Comments off

“Tata Steel Ltd. Wednesday reported a 72% rise in quarterly consolidated net profit from a year earlier due to higher product prices and robust sales growth at its India business, as well as a one-time gain of $561 million on the sale of a plant in Teesside, U.K. The world’s seventh-largest steelmaker by volume said profit for the fourth quarter ended March 31 rose to $937 million, up from $546 million.

Consolidated sales rose 23% to $7.59 billion from $6.17 billion in the fourth quarter, but the earnings margin before interest, taxes, depreciation and amortization shrank to 13.9% from 19.4%. … The Indian operations posted sales of $1.87 billion, with the sales volume at 1.7 million tons. Comparative figures were not provided.

Looking ahead, chief financial officer Koushik Chatterjee said at a press conference that the company’s operations, especially those in Europe, will continue to face cost pressures from escalating raw materials prices, such as iron ore and coking coal. “

Source: Wall Street Journal, May 26 2011

Observations:

  • Europe is Tata’s biggest market, but the largest part of profits come from India, where the company achieved over $400/t EBITDA, compared to less than $100/t EBITDA in other regions. Overall EBITDA margin stands at 14%.
  • Tata expects increasing Indian government expenditure to stimulate the economy as a key driver for growth in the near future.

Implications:

  • The good news for Tata and other steelmakers is that the company has managed to offset the increasing raw materials cost by increasing the price of its products in emerging markets. Though higher steel prices could slow the growth of emerging economies (which China’s government is trying to do anyway), the increase in steel prices is important for steel makers in the region to escape the cost pressure from higher iron ore, coal, energy, and employment costs.
  • Tata is trying to find a new balance in its global operations. It announced a restructuring of its European long products division in order to make it profitable and sold its Teesside plant in the UK. The company tries to strengthen its position in India to benefit from the growth of the Asian market, but is at the same time struggling with the strong and hardly profitable presence in Europe’s mature market.

©2011 | Wilfred Visser | thebusinessofmining.com