Archive
Mining Weekly 51/’12: Freeport, Xstrata, & Bumi
Top Stories of December:
- Freeport diversifies further into oil & gas
- Copper miner Freeport McMoran surprised the market by acquiring two American oil & gas companies for approx. $9bn, taking on a lot of target debt to make a total deal size of approx. $20bn, the second largest acquisition in the industry this year.
- Freeport did not request shareholder approval for the diversifying acquisitions, leaving a large part of the shareholder base unhappy with the deal and the stock price dropping approx. 15%.
- Sources: Freeport presentation; Wall Street Journal; Financial Times
- Xstrata puts Tampakan project on hold
- Xstrata’s $5.9bn Tampakan copper project in the Philippines is put on hold while waiting for government approvals: the federal government doesn’t want to give the go ahead before the mining law is reformed, and the local government is opposing the issuance of an environmental permit based on a ban on open pit mining.
- Sources: Reuters; Sagittarius / Xstrata
- Bumi, Bakrie, and Rotschild continue their fight
- The board of Bumi plc has indicated that it favors the Bakrie offer to buy out the assets of the Indonesian coal producer over Rothschilds offer to increase the stake in those assets. Bakrie’s offer implies that the shared ownership of assets by Bumi and Bakrie comes to an end.
- The board also indicated that it does not intend to sell the stakes in Berau to Bakrie, which would mean the company does not completely revert to a cash shell.
- Sources: Financial Times 1, 2; Jakarta Post
Trends & Implications:
- Deloitte published its annual report with the top trends in the mining industry for the coming year: on top of the list is the continued high cost of doing business, which is forcing many companies to reconsider development projects (see Tampakan above). The full list of trends is:
- Counting the costs: Paying the price of bullish behavior
- Managing demand uncertainty: Conflicting market indicators magnify volatility
- Capital project deceleration: Quality trumps quantity in the project pipeline
- Preparing for the M&A storm: Market indicators point to rising deal volumes
- Governments eye the mining prize: Resource nationalism remains
- Combating corruption: Miners are being held to higher standards
- Climbing the social ladder: A new level of responsible behavior
- Plugging the talent gap: Skills shortages still loom
- Playing it safe: Using analytics to generate insights and improve safety outcomes
- At the IT edge: Getting the most out of emerging – and existing – technologies
- Xstrata’s decision to put the Tampakan project, one of the largest development projects in the copper industry, on hold fits two trends: the increasing importance of alignment with both federal and local governments in developing countries, especially around when governments and legislature are changing; and the hesitance to undertake any large investments in a time of rising costs and uncertainty around demand growth.
2012 | Wilfred Visser | thebusinessofmining.com
Check my latest column in the free online journal The International Resource Journal on the importance of iron ore derivatives.
Mining Week 45/’12: PotashCorp and Rothschild on the offensive
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
Mining Week 51/’11: Grasberg back in business
Top Stories of the Week:
- Freeport McMoran strikes deal on Grasberg
- Freeport reached a two year extension of the collective labor agreement at its Indonesian Grasberg mine after a 3-month strike. The new agreement holds a 40% wage increase over 2 years, improved benefits, and the promise to base wage future negotiations on cost of living and competitor benchmarks.
- Only days after the announcement of the agreement a helicopter transporting Freeport’s workers was shot at close to the mine, wounding one person.
- Sources: Freeport McMoran press release; Wall Street Journal; Financial Times
- Further coal consolidation in Australia
- Less than a year after being put up for sale and then declining all offers made Whitehaven teamed up with Aston Resources to create the largest listed coal mining company in Australia with $5.1bln market value. The deal is structured as a shares only acquisition of Aston by Whitehaven.
- Sources: Financial Times; Whitehaven merger documentation
- Anglo reassured in South African court
- The South African court ruled that the department of mines had no right to grant the mining rights of Sishen iron ore mine in the country to a junior mining company with strong ties to some influential politicians, but that instead the Kumba Iron Ore holds the rights to the mine. Kumba is majority owned by Anglo American.
- Sources: Anglo American press release; Financial Times; Wall Street Journal
Trends & Implications:
- The coal mining industry in Australia is still relatively fragmented, with both the diversified supermajors and many domestic listed and unlisted companies active in the industry. Because the mining districts are much less concentrated than the iron ore or gold districts of the country it is harder to achieve economies of scale that would justify many mergers. The deals taken place are mainly based on transportation and sales negotiation synergies.
- The Wall Street Journal published a good, readable, article this week describing the developments in the mining industry, signaling the combination of two key drivers this year: declining prices, and increasing costs. The resulting low margins will move the focus of many mining companies in the coming years to cost control. However, the winners of this cycle will be the companies that manage to invest during this period with lower profits to build capacity that will make them benefit from the structural increase in prices that will be caused by the structural price increases in the industry. Clearly not all cost increases are structural: equipment and contractor scarcity is mainly a temporary result of an overheated industry; but cost increases resulting from the move to harder forms of mining will stick.
©2011 | Wilfred Visser | thebusinessofmining.com
Mining Week 46/’11: Hard times for emerging market multinationals
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
- Caterpillar is adjusting its geographic footprint by buying a Chinese manufacturer of underground coal mining equipment and by increasing capacity of mining truck manufacturing in Indonesia and the USA. China’s enormous market is still predominantly using equipment from domestic brands.
- Sources: Caterpillar press release 1; Caterpillar press release 2; Financial Times; Wall Street Journal
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
Mining Week 43/’11: Uncertainty in Indonesia
Top Stories of the Week:
- Freeport McMoran faces strikes in Indonesia
- About half of the workers at Freeports’ Grasberg mine went on strike to demand higher pay, forcing the company to shut down operations. Several strikers have been killed by police and unknown gunmen in the past week.
- Sources: FCX press release; Financial Times; Wall Street Journal
- Rio Tinto sells aluminium, buys uranium
- Rio Tinto plans to spin off 13 of its smaller aluminium assets for an estimated $8bln. The company wants to focus its attention on top tier assets.
- Sources: Rio Tinto press release; Wall Street Journal; Financial Times
- Rio Tinto buys Hathor Exploration, a uranium exploration business active in Canada, for over $500mln. Key asset of Hathor is Saskatchewan’s Roughrider deposit.
- Sources: Rio Tinto press release; Wall Street Journal; Bloomberg BusinessWeek
- BHP shops for iron ore in Brazil
- Junior miner Ferrous Resources, worth just over $3bln, is looking for a buyer. BHP Billiton and a Chinese company are talking with management to negotiate a price.
- Sources: Financial Times; Fox Business
Trends & Implications:
- Freeport’s social troubles in Indonesia are the latest labor issue in a rise of labor unrest in the latest year after years of relatively peace in the industry. The unrest mainly affects copper producers, which have seen profits rise with high copper prices, but did not want to increase worker’s compensation too much to secure long term competitiveness.
- The large diversified miners are increasingly focusing their attention on a limited number of extremely large operations, divesting smaller operations. With the spending power of the ‘mining supermajors’ a divide seems to open between the few operators of the world’s key supply areas and the many operators of a range of smaller operations.
- Rio Tinto might face challenges selling the unwanted aluminium assets in one package. Very few companies are able to do acquisitions worth over $7bln, and many of the companies that have the spending power might face antitrust limitations.
©2011 | Wilfred Visser | thebusinessofmining.com
Coal India Plans JV With Indonesian Mining Company
“Coal India Ltd. plans to ask the Indonesian government to allocate it a coal mine, and also seek approval to set up a joint venture with a state-run mining company there. Coal India will ask for the approvals at an October meeting of a coal working group set up by the two countries, Interim Chairman Nirmal Chandra Jha said recently.
He didn’t name the Indonesian company or specify the reserves of the mine that Coal India is targeting.
The proposed Indonesian venture will come after a brief overseas pause for Coal India, the world’s largest producer of the fossil fuel. The company has halted its overseas acquisition plans due to delays in getting government approvals. The coal ministry last year told Coal India to invest only in listed overseas companies after allegations of corruption rocked the federal government. Coal India has so far succeeded in getting allocation of only two blocks in Mozambique.”
Source: Wall Street Journal, September 21 2011
Observations:
- Indian power utilities imported about 42 million tonnes of Indonesian thermal coal last year. Coal fired powerplants produce over half of the country’s electricity. Various Indonesian coal miners are already tied up with Indian financial partners (e.g. Bumi & Tata).
- Indonesia is working on a ban of exports of coal with low calorific value (<5100kcal/kg), which would threaten part of the thermal coal exports from the country.
- Indonesia’s energy coal products exports to China has increased by over 25% per year for the past 5 years.
Implications:
- The Indian government actively tries to reduce secure reliable access to coal via both Coal India and targeted acquisitions by ICVL. As increase of domestic production is slow the government might try to lure foreign miners into operating assets in India to boost productivity.
- Increased Indian investment interest in Indonesia will pressure the Indonesian government to speed up the regulatory processes around the new Mining Law and the proposed environmental taxes. The new law was introduced over 2 years ago, but implementation regulations are still not fully worked out.
©2011 | Wilfred Visser | thebusinessofmining.com
Indonesia’s Indika to Expand Coal-Mining Capacity
“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