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Posts Tagged ‘investment’

Mining Week 25/’12: Whitehaven buyout options; Mine 2012

June 17, 2012 Comments off

Top Stories of the Week:

  • Whitehaven rejects initial offer from largest shareholder
    • Tinkler, largest shareholder of Whitehaven with over 20% of shares, is trying to arrange financing to buy the full group. An initial approach was rejected by Whitehaven as financing of the bid was not deemed solid.
    • Whitehaven became Australia’s largest listed coal group last year after taking over Ashton. Share price dropped approx. 30% over the past 2 months, making the company an attractive buyout target
    • Sources: Wall Street Journal; Financial Times; Reuters
  • PWC launches ‘Mine 2012’
    • Consultancy PWC recently published its annual study on the key industry trends in the mining industry, focusing on the 40 largest mining companies. This year’s report is titled ‘the growing disconnect’, zooming in on the paradox between the need to build new projects to increase supply and the reluctance by shareholders to have their companies commit funds to investment.

Record historical results, high commodity prices, and a bullish outlook shared by many miners continues to underline the industry’s strong fundamentals. But investors’ reluctance to emerge and support growth plans points to a growing disconnect between the market and the mining industry.

Source: PWC

Trends & Implications:

  • PWC identifies the following key trends in their report:
    1. Increased volatility is here to stay
    2. Long-term demand fundamentals remain robust …
    3. … but supply will be the industry’s real challenge going forward
    4. Structural changes to the cost base
    5. Changing fiscal regimes and resource nationalism
    6. Capital expenditure requirements
    7. Can’t bring it on fast enough
  • The report presents the numbers around investment and use of cash for the Top 40 mining companies: $98 billion was invested in capital projects in 2011 and plan for a further $140 billion for 2012. At the same time share prices have decreased across the line. PWC argues 2011 marks the start of the growing disconnect.

©2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 19/’12: Week of the Investors

May 6, 2012 Comments off

Top Stories of the Week:

  • Xstrata’s investors voice GlenStrata concern
    • In the re-election of Xstrata’s directors the vote against re-election of Ivan Glasenberg, the head of Glencore, increased from 3.6% last year to 13.6% this week.
    • When voting on Glencore’s takeover offer for Xstrata a group of approx. 17% of shareholders could block the deal as 75% of shareholders excluding Glencore’s 33% needs to support the deal.
    • Mr. Glasenberg indicated most of the debate on the merger currently is about the share ratio, which Glencore currently offering 2.8 shares per share of Xstrata.
    • Sources: Financial Times 1; Financial Times 2; Xstrata shareholder meeting results; Xstrata notice on Quatar shareholding
  • BHP Billiton and Rio Tinto return cash rather than invest more
    • Both BHP Billiton and Rio Tinto stressed their commitment to dividend and buyback policies this week.
    • Though reiterating the sustained belief in the long-term growth fundamentals of the commodities markets, the focus of the messages in investor presentations is shifting towards limiting and phasing investment, rather than growing as fast as possible.
    • Sources: Financial Times; BHP Billiton Macquarie presentation; Rio Tinto Asian investors presentation

Trends & Implications:

  • Miners currently focus on returning cash to shareholders because of the combination of short-term cost pressures that make margins shrink and longer term uncertainty about the pace of growth of global demand and the direction of metal prices. Citigroup’s forecast of a falling overall capex (see below in FT’s picture) shows uncertainty about how many of the projects in the current pipeline are really going to make it. Investments in star projects are still done, but the projects that could turn out to be marginal or lossgiving are on hold.

  • Mr. Glasenberg’s comments about the share ratio discussion appear to indicate that Glencore’s bid for Xstrata might be sweetened if the deal runs the risk of not being accepted in Xstrata’s shareholder meeting early July.

©2012 | Wilfred Visser | thebusinessofmining.com

Lex: Nationalisation of South African mines

June 30, 2011 Comments off

“Calls for the nationalisation of South Africa’s mines by Julius Malema, recently re-elected leader of the ruling African National Congress’s Youth League, are raising concerns in the industry. Lex’s Edward Hadas and Richard Stovin-Bradford discuss the threat, and whether mine nationalisation is good for the nation.”

Source: FT: Lex – video, June 29 2011

Observations:

  • Julius Malema, a leader of the Youth League of the ANC, has been calling for nationalisation of South African mines to increase control over resources and make the country benefit more from the earth’s riches.
  • Though not set up to facilitate nationalisation, this year’s launch of a state mining company (AEMFC) is seen by many industry experts as a threat to a free mining market in the country.

Implications:

  • An internal power struggle in the ANC party could take long before any moves for nationalization would be taken. However, due to the long horizon of mining projects investors will certainly take this risk in account when looking at South African opportunities.
  • A potential compromise demanded by the ANC to satisfy the demands for more mining benefits for the South African people would be a royalty or tax increase. This would prevent a take-over of control of mining assets by inexperienced and overloaded government institutions, while transferring a larger portion of mining profits to the population.

©2011 | Wilfred Visser | thebusinessofmining.com

The Economist: the wacky world of gold

June 2, 2011 Comments off

“Gold is not like other commodities. … Yet gold miners’ shares have failed to keep pace. This is new. Gold and gold-mining shares used to rise and fall in lockstep. Over the past five years, however, the price of gold has trebled while the value of gold miners has merely doubled. Investors in firms that shift, crush and process rocks are more grounded, it seems, than those who invest in bullion.

As mines age, extracting gold gets harder and costlier. Ores give up less of the metal—average grades have fallen by 30% since 1999 according to GFMS, a consultancy. And ore must be hauled up from ever greater depths. Fuel is pricier. So, too, are labour and equipment, since the global minerals boom has driven up demand for miners and drills.

Finding new seams to replace depleted ones is becoming harder. Metals Economics Group, a mining consultancy, estimates that in 2002 gold miners spent $500m on exploration. By 2008 they were spending $3 billion but finding much less. All the easy gold has been mined already.”

Source: The Economist, June 2 2011

Observations:

  • The Economist identifies several reasons for the share price of gold mining companies to stay behind compared to the gold price: hedging limiting many miners benefits; increasing geopolitical risks; commodity diversification of gold miners; and the emergence of other methods to invest in gold.
  • The article mentions investment demand as the most important source of demand for gold. However, although this demand class is increasing in importance, demand for jewelry (mainly in India and China) still is the most important source of demand (see UBS-graphs below).

Implications:

  • The Economist fails to realize the importance of the supply side impact on the gold price. Miners are not the only source of gold in the market. Over 25% of supply is ‘scrap gold’, recycled from either jewelry or devices. Furthermore, historically the sales of gold reserves by central banks has strongly impacted the gold price.
  • Another important aspect of the gold supply dynamics not mentioned in the article is the development time lag: from investing in the search for gold to producing the first gold will easily take 5-10 years. The boom in gold exploration triggered by the high gold prices is now starting to result in supply increases, with production exceeding the previous 2001 peak. If gold prices stay high, the world will certainly see a slow further capacity increase.

©2011 | Wilfred Visser | thebusinessofmining.com

Mining Industry Scenarios 2011-2014

March 11, 2011 1 comment

How could the mining industry develop in the period 2011 to 2014?

The mining industry is facing uncertain times. In response to the World Economic Forum’s ‘Mining & Metals scenarios to 2030’ I developed two short term scenarios for the mining industry. Both scenarios describe a plausible, consistent, potential development of the industry in the next 3 years:

 

Scenarios:

  • In Red Wave, China’s government manages to sustain demand growth, resulting in high commodity prices. At the same time China invests heavily all around the world, forcing other miners to focus on organic growth.
  • In Countercurrent, revaluation of the renminbi and high interest rates in China lead to lower commodity demand. Prices decrease across the board. Miners struggle to maintain positive margins. New project development becomes of secondary importance.

Full transcript of the video can be downloaded here

©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

Xstrata steps up spending plans

December 8, 2010 Comments off

“Xstrata, the acquisition-built mining company, is once again stepping up spending on its internal portfolio, budgeting $23bn for new mines, smelters and other expansionary projects between 2011 and 2016. Expansionary capital expenditure – or spending exclusively on new projects, rather than the maintenance of old ones – for 2011 and 2012 is forecast at $6.8bn. That compares with expansionary capex of $4.5bn in 2010.

According to Xstrata, high spending in the two years to 2012 will put it over the hump in terms of funding construction of the projects expected to enter service this decade.”

Source: Financial Times, December 7 2010

Observations:

  • The $22.8bln CapEx to 2016 is the result of an increase of the 2011-2012 budget by $1.3bln to $13.6bln and investment plans of $5.0bln for 2013; $1.8bln for 2014; $1.5bln for 2015 and $0.9bln for 2016.
  • Projects expected to be approved in the near term are: Rolleston expansion; Oaky Creek expansion; Cerrejon expansion; Tweefontein; Fraser Morgan; Kabanga; Mt Isa Zinc expansion; and the MRM expansion. The bulk of the investments are in coal (36%) and copper (35%).

Implications:

  • Xstrata earmarks large amounts of cash of development projects, but preserves the flexiblity for further growth by acquisitions. Although the company has not benefited as much from high iron ore prices as major competitors due to lower exposure to the iron ore price, the gearing of 19% gives the company the flexibility to make significant acquisitions.
  • Just like for Rio Tinto the importance of good ties to the Chinese market becomes ever greater. As China is rising in importance as a copper and coal producer, Xstrata will be looking for access to the local market by partnering with Chinese players. Zijin might be a logical partner, although collaboration in the Tampakan deposit in Indonesia has not taken off.

©2010 | Wilfred Visser | thebusinessofmining.com

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