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Mining M&A – Top 40 Share attractiveness ranking

August 4, 2012 Comments off

Valuations across the mining industry are coming down as a result of low commodity prices and uncertainty about the future of the global economy. Many companies are reviewing investment plans, pressured by investors to return money to shareholders if the project pipeline is short of feasible investment opportunities. Most companies in the industry will be extremely careful with large-scale M&A at this moment, but for some companies with either a lot of cash or a good position to give out more equity the reduced prices could provide opportunities to make a big acquisition. The ranking presented below presents the attractiveness of acquiring any of the Top 40 mining companies.

An acquisition of any of the world’s largest 40 miners will have to be financed to a large extent by raising additional capital from equity holders, as the acquisition price would be too high for most companies to pay cash after taking on more debt. The attractiveness of executing a share deal to acquire a company is split into the current level of share depression (historic performance) and the outlook for the share as given in analyst targets (future performance).

The share depression is represented in the chart and the ranking below by taking the ratio of current share price compared to 52-week high, normalized to the performance of BHP Billiton, the largest company in the group (i.e. share depression of BHP Billiton = 1.0). The 52-week high is used surprisingly often in acquisitions as the price paid, as it is easy to accept for many shareholders of the target company that they will receive the highest price over the past year.

The outlook for shares is given by the ratio of consensus analyst target dividend by current share price. Whatever the historic performance of a share, the outlook ratio shows the expected potential for the share. For these large mining companies the consensus target is typically formed out of at least 10 equity analyst and banker targets. An overall ranking score of share attractiveness is calculated by dividing the outlook ratio by the share depression ratio.

In this initial ranking of attractive targets, using closing share price of August 3rd 2012, the top 5 positions are claimed by ENRC, Ivanhoe, Kinross, Peabody, and Anglo American. Each of these shares has taking a significant beating over the past year. Apart from Anglo they have all dropped about twice as far from their year high share price as BHP Billiton. However, analyst targets for each of the companies are high too, each being expected to gain at least 50% of value in the relatively short term. The combination of a big drop in share price and a promising upside makes the companies attractive for potential buyers. Clearly many more factors play a role in target selection, and politics, synergy potential, and several other factors rule out quick action for most of the top targets in the ranking. However, the chart and ranking below do serve well as a quick scan to see which companies are in the ‘danger zone’ of becoming an acquisition target.


©2012 | Wilfred Visser | thebusinessofmining.com

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Mining Week 18/’12: Vale’s profits down; Asteroid mining up

April 28, 2012 Comments off

Top Stories of the Week:

  • Vale profits down on
    • Vale presented quarterly net earnings of $3.8bln, a 45% drop to last years 1st quarter. Revenues were down by approx. $2bln driven by both price and volume decreases. Slightly increased overall costs combined with lower volumes show an significant increase of unit costs.
    • An iron ore price of around $120/t is the current market floor, according to Vale. Many low grade mining operations in China operate at costs around this price, making them go out of business and supply to drop significantly if prices would go below this point.
    • Sources: Vale press release; Financial Times 1; Financial Times 2
  • Gemcom acquired by Dassault
    • Gemcom, one of the premier makers of mine planning software, is bought by Dassault Systems from a group of private equity parties. Dassault pays $360mln, while the private equity parties paid $180mln 4 years ago.
    • Dassault has recently set up GEOVIA; a brand ‘to model and simulate our planet’. It is considering adding more packages to the brand.
    • Sources: Dassault press release; Gemcom 2008 press release; Financial Times
  • Planetary Resources unveils plans to mine asteroids
    • Planetary resources, a startup company backed by an impressive list of investors including Larry Page, unveiled its plans to start exploration of asteroids with the objective of mining platinum, iron, nickel, water, and rare platinum group metals.
    • An exploration station should be active by 2020. Timeline to bring metals back to earth was not given. Estimates of total investment to start producing start at $2.6bln, similar to the development cost of a large mining project.
    • Sources: Wikipedia company info; Planetary Resources company website; Financial Times; Wall Street Journal

Trends & Implications:

  • The innovative plans by Planetary Resources underline a growing drive to find alternative methods to obtain raw materials or to find substitutes for the raw materials we often take for granted. If bringing resources from space to the earth would succeed, this could fundamentally change the supply/demand dynamics of our conservative industry. And why would this not succeed? Especially for those materials where global demand is relatively small (e.g. platinum), this initiative should not be deemed impossible. However, futuristic it certainly is.
  • Dassault’s move to set up a software branch specialized in the natural resources area is riding the trend of increasing importance of standardization and implementation of software tools to manage the portfolio of remote and often interlinked operations of mining companies. Software can help to produce production per employee, an important driver with the current shortage of qualified miners. At the same time the proper integration of operations and managing large parts of the design and operational work for operations from remote locations drives a need for software innovation.

©2012 | 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

Glencore should scale back IPO hopes

May 5, 2011 Comments off

“For Glencore International, it is time for Plan C. Xstrata put the kibosh on Plan A when it refused to consider a merger with the commodities-trading giant that would have enabled Glencore partners to realize the full value of their 34.5% stake in the miner.

Investors now have ruined Plan B by refusing to accept Glencore’s ambitious $60 billion-plus valuation target, which might have allowed a quick post-IPO merger. Glencore has been forced to lower its target and must prepare for a long spell in the public markets.

Glencore’s advisers insist Mr. Glasenberg realizes the need for a realistic price that will allow it to trade healthily in the aftermarket. That would help rebuild investor confidence after the poor start to the IPO. So Glencore’s final IPO price will need to offer investors a generous discount. Mr. Glasenberg should brace himself for a price at the bottom of the range.”

Source: Wall Street Journal, May 5 2011

Observations:

  • The commentators from Wall Street Journal argue that the uncertainty of a potential merger with Xstrata and the politically sensitive nature of Glencore’s mining assets forces the company to offer the shares at a strong discount in the Initial Public Offering (IPO), raising less cash than previously hoped.
  • Glencore is going public to facilitate further growth ambitions. In its current private structure it can not raise sufficient money for further growth. Merging with Xstrata would be an other way to solve this problem, but this requires putting a value on Glencore to decide on the new ownership structure, something Xstrata’s management and shareholders clearly are not willing to do.

Implications:

  • Shares are typically sold at a discount in an IPO, encouraging investors to take a share of the company and realize a paper profit in the first days of trading. However, if shares indeed go up strongly in the first days of trading and market value of Glencore reflects intrinsic value correctly, the WSJ-commentators’ prediction of a difficult negotiation with Xstrata because of skewed valuation does not hold.
  • With current high commodity prices a large part of Glencore’s profit comes from its industrial assets, rather than from trading activities. Citi expects the industrial share to be as high as 60% in the next years. A relatively higher importance of production vs. trading in the company could make integration of Glencore with Xstrata and/or other mining companies smoother.

©2011 | Wilfred Visser | thebusinessofmining.com

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