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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

India may help ‘Mega Steel Projects’

April 28, 2011 Comments off

“India’s Ministry of Steel is preparing a plan to promote several mega-steel projects, each with a capacity of 10 million metric tons, to ramp up domestic steel production at a time when demand is forecast to grow 10% annually as the country makes huge investments in the infrastructure sector. The idea is to create at least 60 million tons of new steel-making capacity by 2020, spread across the mineral-rich provinces of Jharkhand, Orissa, Chhatisgarh, West Bengal, Maharashtra and Karnataka.

The government is concerned about the delays despite demand steadily rising because of the need to construct ports, houses, power plants, factories and automobiles. Domestic demand for steel is expected to grow 10% every year over the next decade, driven by an estimated investment of $1 trillion on infrastructure projects during the 2012-2017 period.”

Source: Wall Street Journal, April 27 2011

Observations:

  • India currently is the world’s 3rd largest steel producer, with a capacity of 73mtpa in 2009-2010 and production close to capacity. Still the country’s steel imports are steadily increasing to satisfy domestic demand. Demand forecast for 2012 is 120mtpa.
  • The ministry’s plan is to introduce a 3-step process in which a state-controlled company packages the projects and sells a ‘ready-to-go’ package of land and licenses to the highest international bidder.

Implications:

  • The ministry’s plan is likely to get opposition from local and regional governments, which currently have significant power in negotiating directly with potential project developers. However, if the plan works it might significantly speed up the development process of both mining and steel processing in the country.
  • The plan is fully designed from the perspective of domestic steel production. As a result it will be hard for mining companies to secure good iron ore and coal assets in the country without partnering with a steel producer in bidding for a packaged project.

©2011 | Wilfred Visser | thebusinessofmining.com

Guinea: Mining Fight Shows Pressure on Multinationals

January 28, 2011 Comments off

“Alpha Condé, the new president of Guinea, pledges to do what none of his predecessors have: Harness vast iron-ore reserves contained in the Simandou mountain chain to give the West African country one of the continent’s most prosperous economies.

To succeed where others have failed, Mr. Condé is revisiting an existing Simandou mining contract with Anglo-Australian miner Rio Tinto, as well as other pacts signed by his predecessors. Foreign investors, no matter how big, will have to follow rules or leave Guinea, he says.

In Guinea, the Simandou contracts are just some of several that are under review in disputes with companies from Russia, China and the U.S. And the outcome of the Simandou dispute is likely to rattle at least one powerful international investor: either Rio Tinto or rival Vale SA of Brazil. Aluminum Corporation of China also has a dog in the fight.”

Source: Wall Street Journal, January 27 2011

Observations:

  • Rio Tinto has teamed up with Chinalco to develop its part of the Simandou deposit (although it is still unclear which part it is exactly entitled to). The Chinese pay $1.35bln for infrastructure development, giving it the right to buy the ore from Rio Tinto.
  • The Guinean government is keeping a close watch on the development plans, pressuring the companies to file plans and start investments, threatening to revoke licenses granted in earlier stages.

Implications:

  • The export of the Simandou iron ore is an interesting case of shared responsibility of corporates and government in infrastructure development. The shortest route to the sea would be a direct link through Liberia, but the infrastructure development to ship the ore through a Guinean port is one of the main benefits the Guinean government could achieve from the involvement of the foreign companies. The government will therefore have to find a balance in pressuring the companies to invest and investing itself to convince the companies to skip the Liberia-alternative.
  • Vale smartly managed its transaction of BSG’s share of the Simandou asset by making 80% of the $2.5bln payment conditional on achievement of specific milestones, limiting the country risk it is exposed to. These types of conditional deals are likely to be the way to move forward in order to limit risk in many countries that are struggling to become more stable and attract investment.

©2011 | Wilfred Visser | thebusinessofmining.com

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