“Cynthia Carroll, chief executive of Anglo American, has downplayed speculation that the multinational miner is on the hunt for acquisitions, saying that bid prices in the mining sector have been ‘too high’ for the company to enter the fray.
‘We are always looking at possible combinations across the sector and always evaluating whether it’s a better business case to build our own projects or look at acquisition opportunities,’ said Cynthia Carroll. But she added that ‘prices are still too high’, basing her comments on recent bids and takeovers.
In recent months, Anglo has been linked to a bid for Riversdale Mining, an Mozambique-focused coal miner that was ultimately bought by Rio Tinto for A$4bn. More recently, it considered a possible bid for Macarthur Coal, an Australian coal miner. Macarthur has since accepted a joint A$4.9bn ($5.2bn) bid from a consortium led by Peabody of the US. The bid values the Macarthur at 18 times estimated 2012 earnings.”
- Anglo American has not made any large acquisitions since 2008, when it bought several iron ore assets in Brazil. Of the 5 large diversified miners the company has been least active in large scale M&A over the past 10 years, as depicted below (click on image for larger version).
- If the acquisitions would be paid in shares, the current low share prices would hinder acquisitions (large dilution of ownership). However, with the current large operating profits acquisitions are mainly paid in cash.
- Valuation of companies is done in various ways, based on standalone company value and additional financial and operational synergies of a change of control, all leading to different results: a ‘true value’ of a company can never be determined, as the value differs per acquirer and valuation assumptions are debatable. However, the fact that various companies are acquiring targets in Southern Africa which would have a better operational match with Anglo American (= higher synergies) implies that Anglo is more conservative in its valuation, being cautious to overpay.
©2011 | Wilfred Visser | thebusinessofmining.com
How could the mining industry develop in the period 2011 to 2014?
The mining industry is facing uncertain times. In response to the World Economic Forum’s ‘Mining & Metals scenarios to 2030’ I developed two short term scenarios for the mining industry. Both scenarios describe a plausible, consistent, potential development of the industry in the next 3 years:
- In Red Wave, China’s government manages to sustain demand growth, resulting in high commodity prices. At the same time China invests heavily all around the world, forcing other miners to focus on organic growth.
- In Countercurrent, revaluation of the renminbi and high interest rates in China lead to lower commodity demand. Prices decrease across the board. Miners struggle to maintain positive margins. New project development becomes of secondary importance.
Full transcript of the video can be downloaded here
©2011 | Wilfred Visser | thebusinessofmining.com
“China plans an aggressive expansion of its iron-ore holdings overseas to increase the share of its imports from China-invested mines, an influential industry official said Wednesday. China Iron & Steel Association Vice Chairman Luo Bingsheng told an industry conference Wednesday that China would seek to derive 40% of ore imports from Chinese-invested sources by 2015.
It is unclear what percentage of China’s iron-ore imports currently come from mines part-owned by Chinese companies. Mr. Luo didn’t give a figure. But the comments from Mr. Luo, who is to retire from the association this week, underscore the desire of China—which produces about half of the world’s steel—to reduce its import bill for iron ore, a feedstock that it paid $80 billion to import last year.”
- China produces about half of the world’s steel, but produces only 15% of the world’s iron ore (in iron content). The remaining ore required for steelmaking is imported, mainly from Australia, Brazil, and India.
- China’s share in mining M&A rose from 22% to 25% ($12bln) last year according to Ernst & Young’s latest report. In the last years more than half of China’s acquisitions took place in Australia.
- BHP Billiton, Rio Tinto and Vale together control some 75% of the global seaborne iron ore trade. If China wants to derive 40% of ore imports from Chinese-owned sources by 2015 it will either have to increase its stake in the three major iron ore producers or erode their share by investing in other growing companies.
- To strengthen the position in iron ore imports the Chinese steel makers, backed by the government via development funds and banks, will have to look beyond Australia to Africa and Latin America. The industry in Australia is rather consolidated, while new deposits developed in Africa might enable China to secure long term supplies.
©2011 | Wilfred Visser | thebusinessofmining.com
What are the things the CEO of the world’s second largest mining company is worried about? What is Vale’s CEO Roger Agnelli doing to catch up with BHP Billiton? What is on top of his “To Do”-list?
An analysis of Vale’s latest annual and financial reports, investor presentations and the news about the company in the last months yields a list of 10 issues that are likely to be at the top of Agnelli’ list of priorities.
The list holds strategic, operational, financial and relational activities, each of which are scored in terms of importance and urgency. Priority 1 on the list is trying to prevent BHP’s acquisition of PotashCorp. Priority 10 is managing breakthrough innovation of copper processing in Carajás. Read on for the full list of priorities.
1. Assess opportunities to prevent BHP Billiton’s PotashCorp acquisition
BHP Billiton has made a hostile $39bln acquisition offer for PotashCorp, thus following Vale’s move of entering the potash business as a diversified miner. However, the potential changes to the market and to potash pricing (currently controlled by regional cartels) are likely to make Vale’s potash assets uncompetitive. Although the company has denied being in talks with PotashCorp to find alternatives, Agnelli will certainly devote a large portion of his time to finding a response to BHP’s offer.
2. Manage integration programs to reduce costs
Vale has grown rapidly partly because of a large number of acquisitions. Insiders comment that many of the acquired companies have never been integrated completely, creating operational inefficiencies and a lack of corporate culture. To sustain growth, Agnelli will be working hard on realizing the synergies from acquisitions by building global businesses. Part of this assignment is the carve-out of the aluminium business, which has been sold to Norsk Hydro this year.
3. Anticipate on Brazilian election results
Brazil will elect a new president, senate and governors on October 3rd 2010. Both economic policy and environmental policy on federal and state level could be impacted significantly by election results. Agnelli is certainly developing scenarios to react on post-election regulatory changes.
4. Study increase of gearing in order to accelerate growth
The company has traditionally grown by M&A, but is currently guarding its gearing carefully. However, in order to enable further acquisitions, Agnelli will be discussing increasing the gearing and accessing debt with the new CFO Cavalcanti, who took over from Fabio Barbosa at the end of June, and banking partners.
5. Compete for position in China
Compared to BHP Billiton and Rio Tinto, transportation distance poses a disadvantage to Vale in supplying iron ore to China. While Rio Tinto is creating strong ties with Chinese government via its partnerships with Chinalco, Vale will need to find alternative ways to improve relationships with clients and government in the country that is responsible for most of the growth in demand of its products.
6. Manage development of Guinean iron ore deposits
An important part of the growth of the iron ore production in the next decade should be coming from Guinea, where Vale will develop the Simandou South deposit. Vale will need to get infrastructure in place and start development soon in order to please the government, which recently took development rights away from Rio Tinto because the company was not proceeding fast enough.
7. Reduce iron dependence
Growing the copper business unit and building a fertilizer business are two of the ways in which Vale tries to reduce its dependence on iron ore. Although the iron ore business is a star business with solid growth perspectives, the volatility caused by the dependence on one single commodity will worry Agnelli. Diversification into other business units is crucial for the long-term stability of the company.
8. Gain access to coal in Latin America
Although a lot of iron ore is shipped to China, Brazil is booming too. In order to produce steel for the domestic market, Vale needs to develop coal capacity in Latin America, which will require strategic acquisitions and targeted exploration.
9. Manage employee relations after Vale Inco strike
The board will need to prevent repetition of strikes like they experienced at Vale Inco during the last two years in Canada. Reviewing and improving international employee relations is both crucial for the company’s productivity and to improve the image in labor market, where Vale still has difficulties to attract international management talent.
10. Manage technological processing innovation for copper in Carajás
The company is trying to scale hydrometallurgical copper processing technology to commercial level in the Carajás UHC plant. Success in this project would have significant profit impact and would position Vale with the current deposits in development as one of the most competitive copper producers globally.
Sources: Vale annual report 2009, Vale summary review 2009, Vale investor presentation February 2010