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Posts Tagged ‘leverage’

Xstrata awaits Glencore overtures

April 14, 2011 Comments off

“Xstrata’s silence speaks volumes. The miner is just waiting for a proposal after Ivan Glasenberg, the head of Glencore, made clear that he is gunning for the London-listed multinational, in which the commodities trader owns a 34 per cent stake.

Breaking a decade-long silence, Mr Glasenberg says he sees value in combining Glencore with Xstrata. ‘Why has that not happened? It is a value debate. Xstrata … seems more comfortable for Glencore to go public and get a market price before they may or may not enter into discussions,’ he adds.

In February, Mick Davis, Xstrata chief executive, raised the prospect of a merger too, telling analysts that the prospect of an independently listed Xstrata and Glencore is ‘unsustainable in the long term’.”

Source: Financial Times, April 12 2011

Observations:

  • Glencore plans to float 20% of the company, worth some $12bln, in an IPO. Current management will retain majority shareholdership.
  • Glencore today announced the composition of its new board of directors, which will include former BP CEO Tony Hayward and former Xstrata CEO Peter Coates.

Implications:

  • The trend to stronger integration of mining firms and trading firms (the trader’s value chain), which is exemplified by the potential Glencore/Xstrata merger, can also be seen in Chinese Minmetals’ foray into mining by forming MMR earlier and planning to acquire Equinox this month.
  • Now that it appears Glencore will IPO prior to merging with Xstrata, its options to combine the two firms are to buy all other shares of the company, to try to get 50%+ of the shares to enable financial consolidation, or to pursue a real (share exchange) merger. With Xstrata’s current market value of $67bln (and Glencore holding 34% of the shares) gaining control will cost Glencore at least $12bln, with a full takeover costing over $45bln.
  • Glencore will be able to use the $12bln raised in the IPO, could leverage this by taking on more debt, and could issue additional shares in a later stage to raise more capital, but it will likely try to convince Xstrata shareholders to accept Glencore shares as a (partial) payment. In this way the combined company will retain significant firepower to do additional opportunistic acquisitions.

©2011 | Wilfred Visser | thebusinessofmining.com

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Caterpillar to Acquire Bucyrus

November 16, 2010 2 comments

“Caterpillar Inc. (NYSE: CAT) and Bucyrus International, Inc. (Nasdaq: BUCY) announced today they have entered into an agreement under which Caterpillar will acquire Bucyrus International in a transaction valued at approximately $8.6 billion (including net debt). The acquisition is based on Caterpillar’s key strategic imperative to expand its leadership in the mining equipment industry, and positions Caterpillar to capitalize on the robust long-term outlook for commodities driven by the trend of rapid growth in emerging markets which are improving infrastructure, rapidly developing urban areas and industrializing their economies.”

Source: Caterpillar Press Release, November 16 2010

Observations:

  • Bucyrus has a product portfolio including drills; draglines; shovels; excavators; mining trucks; highwall, longwall and room & pillar miners; and belt systems. This portfolio complements the position of Caterpillar, which is mainly strong in loaders and trucks in the mining industry. Sales are roughly equally divided over surface and underground mining equipment.
  • The offer worth $8.6bln is all cash, forcing Caterpillar to increase debt by approx. $5bln and equity by approx. $2bln. However, as Caterpillar is more highly leveraged than Bucyrus, the deal will actually help CAT to reduce leverage.

Implications:

  • The premium of 32% will have to be justified by synergies that are mainly to be found in consolidation of the supply chain, dealer and service network and in the potential for increased revenues as the Caterpillar gains a stronger position to be the sole-source supplier of mines
  • The closing of the deal is subject to regulatory approvals, which might force Caterpillar to divest some assets in order to prevent a dominant position in several markets. Especially in the area of mining trucks the new company becomes a dominant player, as Bucyrus bought the mining division of Terex early this year.

©2010 | Wilfred Visser | BlogCatalog | thebusinessofmining.com

Capital Structure after the Crisis

November 15, 2010 Comments off

The global recession has forced many companies to reevaluate their capital structure. Both the cost of debt and the likelihood of bankruptcy at high debt levels increased, offsetting the benefit or reduced tax expenses at high debt levels. It is therefore no surprise that the largest diversified miners have decreased their gearing. They have benefited from increasing commodity and share prices to reduce debt stake of firm market value to around 33% ((D/E); or 25% in D/(D+E)), in line with the industry’s historical average. A year ago Ernst & Young observed in a report on debt in the mining industry that the gearing had increased to 46%.

 
Liability comparison
The liability breakdown based on market value of equity for the 4 major diversified miners shows the strong position of BHP Billiton (Figure 1). The 86% equity in the financing mix, combined with over $12bln in cash, gives the company an enormous financial flexibility. Anglo American struggles to keep up with the other majors at a total of 66% equity (gearing of approx. 50%).

The Book Value liability comparison does not show significant differences. The relatively large portion of common stock in Vale’s balance sheet mainly indicates that the company issued large amounts of stock more recently than the other companies.

Figure 1 - Liability structure comparison


 

Asset comparison

Figure 2 - Asset comparison

While gearing of the companies varies quite a bit, the asset base is remarkably similar (Figure 2). The assets of the large miners typically show approx. 67% Plant, Property & Equipment (PP&E). The most obvious variation among the companies is the percentage of “other fixed assets”, which hold the goodwill created by paying a premium in acquisitions of other companies. Rio Tinto’s balance sheet still holds $14bln goodwill (33% of total assets), mainly because of the acquisition of Alcan in 2007. The relatively high percentage for Anglo American is not caused by goodwill but by a high proportion of long term investments in other companies.

Another important difference is the percentage of cash carried by the various firms. While the diversified miners typically need approx. 2-3% of asset value as operating cash, BHP Billiton holds 14% ($12bln), signaling a pile of excess cash held as a war chest for potential acquisitions. Rio Tinto’s cash at 4% of asset value is a healthy level, but indicates the company does not have much flexibility for acquisitions and/or capital projects in the short run.

 

Company specifics

The figures below show the evolution of asset base and capital structure of each of the four miners over the past 4 years.

BHP Billiton

BHP Billiton has maintained a stable asset base over the past years, using the large profits to slowly build a war chest for acquisitions. After the failure of the bid for Rio Tinto in 2008 and the potential failure of the bid for PotashCorp of Saskatchewan this year the company will have to reconsider announcing a superdividend or repurchasing shares to give cash back to shareholders.
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