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Posts Tagged ‘iron ore’

Mining Week 8/’13: BHP names new CEO

February 24, 2013 Comments off

Top Stories:

  • Oil man Andrew Mackenzie named BHP Billiton CEO
    • BHP Billiton announced this week that CEO Marius Kloppers will step down in May and will be succeeded by Andrew Mackenzie, the current head of the company’s non-ferrous division, who worked for BP for 22 years and who worked for Rio Tinto prior to joining BHP Billiton.
    • Sources: BHP Billiton press release; ABC interview; Youtube Reutersvideo
  • Iron ore prices at 16-month high
    • Benchmark iron ore prices rose to a 16-month high at approx. $160/t this week. A cyclone is nearing the Australian coast, potentially causing supply disruptions in the coming week.
    • Sources: CNBC; Indian Express

Trends & Implications:

  • BHPB’s appointment of a chief executive with extensive experience in the oil and gas business signals a further shift of focus from mining to natural resource extraction in general. Given the importance of cost control in the coming years, and considering the company’s asset base in oil and gas and the limited understanding of the oil and gas industry by most miners, appointing an insider with good knowledge of the full range of assets is a logical choice.
  • The increase of iron ore prices is expected to be a relatively short-term development driven by weather expectations and the annual cyclical demand of Chinese importers. which peaks in Q4 and Q1. Long-term price expectations are still much below the current level as additional production capacity is being added at a high pace.

2013 | Wilfred Visser | thebusinessofmining.com

Mining Week 1/’13: Anglo and Mittal sell iron ore assets

January 6, 2013 Comments off

Top Stories:

  • Anglo and Cliffs sell 5Mtpa Brazilian iron ore mine
    • Anglo American and Cliffs Natural Resources sell their 70% and 30% stakes in the Northern Brazilian Amapa iron ore mine to private miner Zamin Ferrous for approx. $400m. A year after buying their 70% share 4 years ago, Anglo took a $1.5bn writedown on the asset.
    • Sources: Anglo American; Financial Times; Reuters
  • Bumi looses $422m in derivatives trading
    • Bumi Resources, partly owned by Bumi plc and part of the dispute between the Bakri family and Nath Rotschild about the future of Bumi, posted a loss over the first 9 months of 2012 driven by low coal prices and a loss of over $400m on derivatives.
    • The loss on derivatives value was driven by a re-calculation of early payment rights, changing the discount rate of the value of that option from 5.25% to 17.2%.
    • Sources: Bumi Resources results; Financial Times; Wall Street Journal
  • ArcelorMittal sells 15% stake of Labrador Trough for $1.1bn
    • Cash-hungry steel maker and miner ArcelorMittal decided to sell a 15% stake of its Labrador Trough iron ore project in Canada to Chinese steel maker Posco and Taiwanese steel maker China Steel, also signing long-term offtake agreements.
    • Sources: ArcelorMittal press release; Financial Times; The Hindu

Trends & Implications:

  • The sale of iron ore mines or stakes by ArcelorMittal and AngloAmerican signal 2 different trends in the industry:
    • The large miners are actively divesting non-core assets, trying to focus management attention and funding on the large operations and development projects.
    • Many companies are having trouble securing the funds required to execute the enormous development projects that are currently in execution phase in the iron ore industry. Forming partnerships and selling minority stakes is often the cheapest way to obtain funding.
  • The loss reported by Bumi Resouces is not a sign of mismanagement, but rather a sign of cleaning up the books and trying to make sure the assets listed are actually worth what they are listed for. Valuation of options is a highly subjective art, and the management of Bumi Resources apparently chose to take the revaluation hit at a moment when low coal prices were forces the results into the red anyway.

2013 | Wilfred Visser | thebusinessofmining.com

Mining Week 47/’12: BHP sells diamonds; Anglo pays for iron ore

November 18, 2012 Comments off

Top Stories of the Week:

  • Harry Winston buys BHP’s diamond business for $500m
    • Diamond retailer Harry Winston has decided to buy BHP Billiton’s diamond business for $500m cash. The business consists of 80% of the EKATI diamond mine in Northern Canada and sorting and marketing units.
    • Both BHP Billiton and Rio Tinto put their diamond businesses up for sale this year. Rio Tinto might be reconsidering that decision as it couldn’t secure a good price for its Diavik mine and its Indian holdings have come back with good exploration results.
    • Sources: BHP Billiton press release; Harry Winston press release; Financial Times
  • Anglo’s Minas Rio iron ore project delayed and more expensive
    • Anglo American announced that Minas Rio, its 26.5Mtpa iron ore project in Brazil, will not start producing before the second half of 2014. The delay is caused by license issues around construction of power transmission lines.
    • Anglo also announced that the total capital cost for the project is “unlikely to be less that $8.0bn”, making this the first major iron ore project which costs more than $300 per millions tonnes capacity.
    • Sources: Anglo American press release; Reuters; mining.com
  • Qatar’s support appears to seal GlenStrata deal
    • The Qatar Sovereign wealth fund has announced it will support Glencore’s offer of 3.2 shares per share for Xstrata, making it very likely that the largest mining deal of the past years will become reality. Xstrata’s shareholders get to vote on Tuesday.
    • Qatar, Xstrata’s 2nd largest shareholder after Glencore, also announced it will abstain from voting on the retention incentive package for Xstrata top management, making it very likely that this >$200m retention package will not become reality.
    • Sources: Qatar holding; Financial Times 1; Financial Times 2

Trends & Implications:

  • Anglo’s issues in Brazil demonstrate the enormous importance of getting power issues for large projects sorted out early. Last month Rio Tinto’s enormous Oyu Tolgoi project in Mongolia was only hinging on a power supply agreement with the Mongolian and Chinese governments. Many projects in developing countries either need to secure power supply from other countries or have to build their own power plants, forcing them to go through tremendous licensing issues and import natural resources to get their operations powered up.
  • When the Xstrata retention package is voted down, a big group of top-level executives at Xstrata can be expected to start looking for new jobs quickly, opening up a great pool of talent for other companies. The corporate cultures at Xstrata and Glencore are so different that many miners will have to adjust to the more aggressive, top-down culture of the trading house. Many of the top managers will prefer to find a good job in another mining house instead.

2012 | Wilfred Visser | thebusinessofmining.com

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 42/’12: Bakrie vs. Bumi

October 13, 2012 Comments off

Top Stories of the Week:

  • Bakrie proposed to buy Bumi’s assets
    • The Bakrie Group, which owns approx. 24% of Bumi Plc, has an offer to buy Bumi plc’s assets (Berau and Bumi Resources) and leave the London listed miner active in Indonesia behind as a cash shell. The group previously held 48%, but sold 24% to Borneo Lumbung to ease debt issues.
    • Bumi’s share price has dropped 80% versus the high in July 2011 on the back of low coal prices and governance issues.
    • Sources: Financial Times 1; Financial Times 2; Wall Street Journal

    Bumi plc structure: London listed miner owns a stake in Berau coal and Bumi resources.

  • BHP Billiton seeks to cut costs

Trends & Implications:

  • Bakrie’s move to leave Bumi plc could imply the end of the Indonesian coal ambitions of Rothschild’s venture. If Bakrie finds the money to execute the deal, it offers other shareholders an opportunity to limit their losses. Bumi could try to reinvent itself and buy assets in other regions with the cash received for Bumi resources and Berau, but it would start with significantly less cash to acquire companies than in its attempt in 2011.
  • The updated M&A share attractiveness tracker shows a relative leveling of the playing field in terms of mega M&A over the past month. South African listed companies clearly took a major hit, but as the outlook for these companies deteriorated at the same time the shares have not gained much attractiveness from an acquisition standpoint. Fortescue managed to fend of urgent debt issues and saw its share price rise, but it remains one of the more attractive acquisition targets. BHP Billiton lost its position as the best positioned acquirer as outlook for the company deteriorates with the expectation of slowing global demand.(

2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 39/’12: Fortescue moves on; GlenStrata almost there

September 22, 2012 Comments off

Top Stories of the Week:

  • Xstrata’s board votes October 1st on Glencore offer
    • The decision by Xstrata’s board on whether or not to endorse Glencore’s new bid for the company is delayed by a week to October 1st. The endorsement might help to convince a majority of shareholders to accept the offer for 3.05 shares of Glencore per share of Xstrata.
    • The debate around generous retention packages for Xstrata’s key managers started again as several large shareholders voiced their discontent. Glencore stressed nothing will change to those packages unless Xstrata’s board wants to adjust them. Finding a compromise to satisfy the key shareholders might be the final step for the board to make the deal happen.
    • Sources: Wall Street Journal; Financial Times 1; Financial Times 2
  • Fortescue solves debt problems by refinancing $4.5b debt
    • Fortescue announced refinancing of $4.5bn debt with Credit Suisse and JP Morgan as underwriters. Debt maturity of the new deal is 5 years. The company was facing liquidity problems as low iron ore prices and aggressive investment schedules were undermining its ability to repay debt.
    • Sources: Wall Street Journal; Fortescue announcement

    Fortescue’s debt profile prior to refinancing

  • Oyu Tolgoi waiting for power
    • Rio Tinto’s Oyu Tolgoi mine is 97% complete, but negotiations with Mongolian and Chinese governments on power supply delay startup. Oyu Tolgoi built 220Kvolt power line to connect to the Chinese grid, but can’t sign a offtake agreement without consent of the Mongolian government
    • Sources: Financial Times; The Australian; Project website

Trends & Implications:

  • Oyu Tolgoi’s trouble to get powered is just one example of the challenges many large operations face to secure affordable power supply. The power requirements of a large operation require a significant change and development of power grids of many developing nations. Generation capacity is typically not readily available and the large offtake trigger discussions about long term price agreements.
  • After meeting with Glencore’s board this week, Xstrata’s board appears to be working hard to make the merger/acquisition go ahead. It is hard to imagine another outcome in which Xstrata’s shareholders get more value for their company, making it likely they will accept the offer. If the deal is approved by Xstrata’s shareholders, the changes in holdings various large investors will likely make will give an interesting insight into the clientele effect the integration of a mining house and a commodity trader could have.

2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 38/’12: Fortescue in debt trouble; South African shutdowns

September 16, 2012 Comments off

Top Stories of the Week:

  • Fortescue trading halted in prep for announcement
    • Trading in Fortescue’s shares has been halted in preparation of an announcement to be made by Tuesday Sep-18. The company earlier in the week stressed it is in compliance with all its debt covenants, but it is looking to restructure debt as low prices and aggressive expansion investment could result in short-term liquidity problems for the company.
    • Fortescue is a rapidly growing iron ore producer active in Western Australia’s Pilbara region. The company is ramping up to produce 155mn tonnes per year (from a current 60Mtpa), but it has lost 50% of its market value over the past 6 months as investors doubt it will manage to finance the investment plans without sustained high iron ore prices.
    • Sources: Fortescue announcements; Financial Times; The Australian
  • South African trouble spreads beyond Lonmin
    • Anglo Platinum shut down its Rustenburg operations this week as employees showing up for work were intimidated by striking colleagues. In the meantime Lonmin’s Marikana operations are still shut down and Xstrata and GoldFields reduced production in precautionary measures.
    • Despite talks between Lonmin and unions a deal between the striking miners and the company appears to be a long way off. The gap between Lonmin’s wage increase offer and the demands by the unions is over 100%, and the social unrest and promises made by many leaders make it hard for the unions to accept a deal that is much lower than the initial demands.
    • Sources: Financial Times 1; Wall Street Journal; Financial Times 2
  • Glencore’s new offer received positively
    • Glencore released the details of its new offer for takeover of Xstrata. The increased share ration and deal terms appear to win over a sufficient part of Xstrata’s shareholders to make the deal happen. Qatar’s sovereign wealth fund, Xstrata’s 2nd largest shareholders behind Glencore, did not yet respond to the offer.
    • According to the new terms Xstrata’s CEO Mick Davis would have to step down and leave the reign to Glencore’s Ivan Glasenberg within 6 months and the retention package for senior Xstrata managers would stay intact unless Xstrata’s board of directors wants to change it.
    • Sources: Glencore documentation; text; Financial Times

Trends & Implications:

  • Fortescue might suddenly become the focal point of the next big takeover attempt in the mining industry. Share price has decreased dramatically compared to iron ore majors, and both BHP Billiton and Rio Tinto could realize significant synergies with Fortescue’s operations and projects in Western Australia’s Pilbara region.
  • The current low iron ore price has created a situation in which Fortescue’s share price is depressed because operating cash flow does not support the planned combination of investment and debt repayment. Fortescue’s expansion is for a large part finance by debt, loading a company which is worth just over $9bn with over $8bn of debt. BHP Billiton, Rio Tinto, and Vale should all be interested in an acquisition and would be able to get a better deal at debt restructuring because they would pose a lower risk of default to lenders.
  • Caused in part by less potential for economies of scale in transportation than the key competitors, Fortescue operates at clearly higher costs (i.e. lower margins) than Rio and BHP. Quickly realizing cost synergies and aligning the project portfolio with the larger portfolio for the acquiring company would/will be the focus of successful integration.

2012 | Wilfred Visser | thebusinessofmining.com

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