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Mining Week 52/’11: Chinese investment welcome in Australia

December 31, 2011 1 comment

Top Stories of the Week:

  • Australia solicits Chinese infrastructure investment
    • The government of Western Australia is trying to speed up the development of port and rail facilities of the Mid West region’s Oakajee port by stripping the Mitsubishi/Murchison combination of exclusive development rights and inviting Chinese parties to step in. 8 of the 14 projects in development in the region have Chinese investors.
    • Sources: Wall Street Journal; Government statement; Murchison Metals statement
  • Yanzhou teams up with Gloucester coal
  • Anglo and Codelco fight for Minas Sur stake
    • Anglo American launched a range of claims in Chilean court trying to prevent Codelco from being awarded the right to buy a full 49% of the Minas Sur assets. The scope of the option for Codelco to buy 49% has been unclear since Anglo sold a 24.5% stake to Mitsubishi. In response to Anglo’s claims Codelco restated its intention to acquire 49% of the full project.
    • Sources: Financial Times 1; Financial Times 2; Anglo American press release

Trends & Implications:

  • As expected Chinese investments have proven to be a key driver of M&A activity in the mining industry in 2011. It is noteworthy that many Chinese firms are using a foreign based subsidiary or team up with a Western firm to do foreign investments. This structure holds 2 main benefits for the Chinese investors: they obtain an experienced western staff with knowledge of the way of doing business in the target countries; and they are viewed much more favorably by regulators when trying to execute deals.
  • The fight of Anglo American and Codelco over Minas Sur appears to become a long term court fight. The longer this court fight stretches, the more inclined Anglo American will be to find a compromising deal, as the uncertainty about the ownership structure will delay all investment decisions for the company in the mining region.

©2011 | Wilfred Visser | thebusinessofmining.com

Vedanta delivers strong results, but faces operational challenges

November 12, 2010 Comments off

“The company reported revenues of US$4.6 billion and an EBITDA of US$1.3 billion in the first
half of this year due to higher volumes and realisations across all operations as compared with
the corresponding prior period. Operating profit was US$985 million and attributable profit
was US$337 million, a 39.4% share of net income.

US$479 million of free cash flow was generated after investing c. $1.1 billion in growth capex.
Net debt and gearing were $1.6 billion and 11.6% respectively. Gearing is expected to be less
than 40% after completion of the Cairn India acquisition, and is expected to reduce quickly
given the inherent cash generation of the group.”

Source: Vedanta Interim Results Presentation, November 11 2010

Performance:

  • Vedanta, the major Indian diversified mining company (although run from London), posted record profits, mainly driven by increases of zinc and iron ore prices. EBITDA margin of around 40% is lower than for some international competitors, but reflects the broad base of small mines the company owns in India.
  • The company is well positioned to be the supplier of choice for the rapidly growing Indian industry. The extension of its business into oil & gas and utilities helps the group to be rather self-sufficient, making it less dependent from poor national infrastructure than international competitors trying to enter the country

Challenges:

  • Upon analysis of the increase of EBITDA the results are not as strong as initially expected. The increase is fully explained by increase of commodity prices (see figure below). Volumes only increased a little bit, completely driven by iron ore volumes. In terms of cash costs, royalties and other comparable items the performance in the 1st half of fiscal year 2011 was actually worse than in the 1st half of fiscal year 2010.
  • The EBITDA breakdown is partly explained by the challenges the company is facing to comply with the rapid changes in regulatory environment in India. The company is struggling to get new assets up to speed as litigation for environmental and ethical/legal issues is forcing it into defensive positions. Apart from the iron ore operations, the low productivity in its mines does not seem to improve.

©2010 | Wilfred Visser | thebusinessofmining.com