Archive
Mining Week 44/’11: Exchange rate and steel headwinds
Top Stories of the Week:
- Peabody and ArcelorMittal get MacArthur; then ArcelorMittal gets out
- Only 2 days after PEAMcoal, the vehicle set up by Peabody energy and ArcelorMittal to buy Macarthur, announced it obtained a majority interest, Arcelor decided to get out of the combination. The company will sell the 16% of Macarthur it had to Peabody. Peabody had teamed up with ArcelorMittal because an earlier bid had not gained the support of the major shareholders.
- Sources: Reuters; Financial Times; ArcelorMittal press release
- Vale suffers $2.8bln exchange rate hit
- Vale posted disappointing results for the 3rd quarter: the weak Brazilian real compared to the US dollar hit the company hard, iron ore spot prices dropped 27% q-on-q, and production volumes were lower than planned.
- Sources: Vale press release; Financial Times; Wall Street Journal
Trends & Implications:
- The move of ArcelorMittal out of the Macarthur acquisition is a surprising sign of hesitance and uncertainty about the development of the global steel market. The company prefers cashing $700mln over having to pay an additional $1.2bln to get 40% of the Australian coal miner. It still plans to build an iron and coal mining business to increase self-sufficiency. US steelmakers are also struggling and iron ores prices have plummeted in expectation of falling steel demand.
- Exchange rates remain a very important factor in the competitiveness of miners because sales for miners around the world are typically in US dollars, irrespective of the currency in which costs are incurred. As shown in the exchange rate graphs below the Brazilian real has been hit harder than the Australian dollar, key currency for iron ore production of Rio Tinto and BHP Billiton, in the past quarter.
©2011 | Wilfred Visser | thebusinessofmining.com
Anglo American eyes Macarthur coal
“Anglo American is considering a counterbid for Macarthur Coal in an attempt to gatecrash a A$4.7bn (US$4.9bn) bid for the Australian coal group from Peabody Energy and ArcelorMittal. Earlier this month, Macarthur said it was open to offers that valued its business at nearly A$5bn after formally rejecting an ‘opportunistic’ bid from Peabody Energy of the US and steelmaker ArcelorMittal.
People familiar with the bid process said there were a number of interested parties, one of which was Anglo American. The mining group is said to be working with its traditional advisers, which include Goldman Sachs.
It is not clear whether Anglo will proceed with any offer, and talks are expected to come to a head in the next week. A deal would be the largest by Anglo since 2007, with its recent blooming profits creating a degree of financial flexibility that the company has not enjoyed for several years.”
Source: Financial Times, August 21 2011
Observations:
- Peabody and ArcelorMittal have made an offer to the shareholders of Macarthur after Macarthur’s board declined to agree to the offer and not search for higher bidders.
- Anglo’s metallurgical coal operations are currently mainly located in Queensland, giving a good geographical match with Macarthur’s operations.
Implications:
- The current stake of ArcelorMittal in Macarthur will be an important hinderance for other parties to make a counterbid. If their bid would succeed, they would still be left with ArcelorMittal as an important party in the board room.
- Potential other parties interested in buying Macarthur could be Chinese steel makers and/or coal miners, other large coal producers in Australia (Rio Tinto, BMA), government backed Indian coal miners, or even Vallar/Bumi. Based on the proximity to existing operations Anglo would be able to justify a higher premium than new entrants in the Queensland coal industry.
©2011 | Wilfred Visser | thebusinessofmining.com
Peabody, ArcelorMittal Sweeten Offer for Macarthur
“The world’s largest private-sector coal miner and the largest steelmaker by output on Thursday sweetened their offer for Australian pulverized coal miner Macarthur Coal Ltd. to around A$4.73 billion (US$5.05 billion), while moving a step closer to success by agreeing to start due diligence on the deal. Peabody Energy Corp. and ArcelorMittal said Monday they would start receiving data and site access from Macarthur from the coming Monday.
St. Louis-based Peabody and Luxembourg-based ArcelorMittal made an indicative A$15.50 per share bid for Macarthur, the world’s largest miner of pulverized steelmaking coal, according to the announcement Monday.”
Source: Wall Street Journal, July 14 2011
Observations:
- Peabody tried to buy Macarthur early 2010, but this offer did not convince the 3 major shareholders (ArcelorMittal, Posco and Citic). In the new offer, announced last week, Peabody teams up with ArcelorMittal in a 60%/40% ownership structure.
- The sweetening of the offer consists of the withdrawal of the demand that a $0.16/share dividend not be paid out by Macarthur. In turn the buyers get access to the due diligence information required to test the offer assumptions and to prepare integration.
Implications:
- It appears Macarthur’s board is cooperative in the deal, opening books and mines for inspection in exchange for a small increase in value for current shareholders (approx. 1% of market value).
- If the deal goes ahead the major shareholders that don’t participate in the takeover will need to decide whether or not to sell their shares. Posco and Citic both are strategic shareholders, but only Posco has interest in retaining access to Macarthur’s products, which will potentially become much more difficult if competing ArcelorMittal increases its ownership stake.
©2011 | Wilfred Visser | thebusinessofmining.com
Australian Miners Look West for Capital
“After providing a flood of capital when the rest of the world was closing its checkbooks during the financial crisis, China’s mostly state-controlled mining sector is likely to find itself increasingly outgunned in the race for Australian resources, according to bankers to the industry.
‘Through the financial crisis, China was the provider of capital of last resort,’ said Alan Young, a managing director at J.P. Morgan in Sydney. ‘What you’re seeing now is that companies have other options.’
The return of commodities prices to historic highs in recent months has changed the equation, making funding from Asian end-users more of an option than a necessity.”
Source: Wall Street Journal, November 3 2010
Observations:
- Various Australian mining firms have raised money on stock markets (Fortescue, MacArthur) now that investors turn back to markets and interest in mining stocks is increasing. This reduces the need for the mining companies to raise cash by partnering with cash-rich Chinese firms.
- The increase of the exchange rate of the Australian dollar versus the American dollar and the Chinese Renmimbi further decreases the attractiveness for Chinese firms to invest in Australian mining property.
Implications:
- Chinese companies have ongoing interest in expansion abroad. As they will have to compete with other sources of money for western companies they will resort to offering more favorable conditions or to acquiring foreign assets.
- The increasing competitiveness to act as financer of mining projects strengthens the need for the Chinese mining and metals industry to consolidate; creating less but stronger companies that have the power to make international deals.
©2010 | Wilfred Visser | thebusinessofmining.com
Peabody’s bid for Macarthur collapes
“Peabody Energy’s plan to acquire Macarthur Coal for A$3.8bn (U$3.3bn) has collapsed after the Australian miner yesterday said it could not recommend a revised takeover offer that was unlikely to win support from its two largest shareholders.
Macarthur said that based on the price and the conditions of the proposal it could not recommend the Peabody offer to shareholders, adding that the board felt that there was ‘no basis for further engagement with Peabody on the terms of its current proposal’. The US coal group last week cut its cash takeover offer for Macarthur , the world’s biggest supplier of pulverised coal, from A$4.1bn to A$3.8bn, or A$15 per share.
It did not specify why the price was lowered but referred to its examination of Macarthur’s financial records and Australian plans to introduce a new 40 per cent tax on profits generated by resource companies starting in 2012.”
Source: Financial Times, May 19 2010
Observations:
- The board of Macarthur, following the shareholders decided not to support the take-over. The board had set a 75% approval rate from shareholders, which was not met.
- Macarthur shares had risen significantly as stock holders would get a good premium for the shares. Now that the bid from Peabody has collapsed, share price is returning to more realistic values.
Implications:
- Citic, ArcelorMittal and Posco own just under 50% of the Macarthur shares. They are unlikely to approve any take-over that will threaten their position as buyers of the coal, which they need for their steelmaking activities. Obviously Peabody did not convince them on this point.
- Although Peabody does not tell the Australian tax increase has forced them into moving away, it will certainly have affected the ease with which they accept the decision.
Note: in July 2011 Peabody made a new offer in cooperation with ArcelorMittal
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