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Posts Tagged ‘nationalization’

Mining week 26/’12: Resource nationalism & slowdown worries

June 24, 2012 Comments off

Top Stories of the Week:

  • Glencore mine in Bolivia nationalized
    • Bolivia nationalizes the Colquiri zinc and tin mine, one of 5 of Glencore’s assets in the country. The government promises to give a ‘fair compensation for equipment.
    • The nationalization comes after several weeks of labor conflicts between Colquiri’s workers and Glencore’s local subsidiary
    • Sources: Wall Street Journal; Glencore press release; La Prensa Bolivia
  • Rio Tinto invests $4bln more in Pilbara region
    • Rio Tinto has decided to spend an additional $3.7bln in the Pilbara region as part of its long-term investment plan.
    • $2.0bln of the funds will be used for infrastructure enhancements to allow the company to meet its output targets. The other $1.7bln will be used to extend the life of one of the largest mines in the area.
    • Sources: Rio Tinto press release; Financial Times; Fox Business
  • Media stress commodity price uncertainty

    • The disparity between performance of global mining stocks and metal prices is triggering debate in banking world and media about the potential impact of a further slowdown of the global economy.
    • Sources: Mining Weekly; Financial Times

    Trends & Implications:

    • The uncertainty about short-term economic developments in both OECD countries and developing economies, most notably China, is causing share prices across the mining industry to lag the current performance of both metal prices. The uncertainty for short-term prospects apparently also affects the long-term outlook for the industry, making investors believe price and profit levels can’t be sustained. As a result, Price/Earnings (PE) ratios are dropping, causing market capitalization to go down despite good company performance.

    ©2012 | Wilfred Visser | thebusinessofmining.com

Mining sector feels heat as Peru turns left

June 8, 2011 Comments off

“Shares in mining companies operating in Peru fell sharply on Monday after a leftwing former coup leader won a narrow victory in the country’s presidential election. Grupo Mexico, a metals mining company with operations in Peru, fell 8 per cent in New York trading. Hochschild, a silver miner, and Southern Copper Corp, tumbled 5 per cent and 11.3 per cent respectively. Shares in Xstrata, which is building one of Peru’s biggest mines, were off 0.86 per cent, while Volcan Compañía Minera, in which Glencore has a stake, fell 8 per cent.

Ollanta Humala’s victory has provoked widespread fears he would lead a wave of nationalisations and higher taxes on foreign companies. Mr Humala has suggested Peru could impose a windfall tax of up to 40 per cent on mining companies, and also raise the 30 per cent rate that miners currently pay. Trading was suspended after Peru’s stock market plunged more than 12 per cent. The precipitous fall dragged down other markets from Chile to Mexico. BHP Billiton, Rio Tinto and Anglo American, none of which have Peruvian operations, escaped the sell-off.”

Source: Wall Street Journal, June 7 2011

Observations:

  • Current corporate tax rate for miners in Peru is 30% + 3% royalties/duties + 4.1% on dividends, which is below international benchmarks (see PWC Global mining tax comparison for details)
  • The most active international mining companies in Peru are Xstrata, Newmont, Freeport-McMoran, and First Quantum. The effect of the election results on the stock price of Newmont is displayed below, showing a sudden 2% loss vs. other gold miners.

Implications:

  • The average stock price decrease of around 10% of Peruvian companies reflects the risk of a tax increase. As the market value is the market’s expectations of future profits, the 10% increase corresponds well with a high likelihood of an approximate 10% tax increase (i.e. 10% after-tax profit reduction) plus the additional risk of increased government control.
  • Besides the risk of tax increase and increased government control, foreign companies face the risk of rapid employment cost increases as the new government will quickly try to make a mark in supporting wage increases.

©2011 | Wilfred Visser | thebusinessofmining.com

AEMFC: South Africa’s state owned miner

March 2, 2011 Comments off

“South African President Jacob Zuma launched the new ‘competitive’ State mining company, which will produce 800 000 t/y of energy coal at its first mine and synthetic crude oil from another in 2013. President Zuma turned the first sod at the new R130-million ($18.7mln) 120-employee Vlakfontein coal mine, which is situated 100 km east of Johannesburg and 10 km northwest of the town of Ogies, the first venture of the State-owned African Exploration Mining & Finance Corporation (AEMFC), which envisages being a top-five coal producer by 2020.”

AEMFC CEO Sizwe Madondo tells Mining Weekly Online that discussions with State electricity utility Eskom indicate that the Vlakfontein coal, which will be produced at an initial rate of 800 000 t/y, will be competitively priced. Eskom, which will be the buyer of the Vlakfontein coal, currently burns 115-million tons of coal a year, and expects to be burning 250-million tons a year by 2018.”

Source: Mining Weekly, February 26 2011

Observations:

  • Original launch of the state-owned company at Vlakfontein mine was planned for October 2010, but was postponed for several months. Apart from operating the coal mine the government aims to combine its minority participation in mining companies around the country in AEMFC.
  • The company appears to be mainly focused on Energy minerals (coal, synthetic oil from coal, and uranium). The ambition to be a top-five coal producer by 2020 therefore most likely is based on energy coal production.
  • According to BP’s energy statistical review South Africa accounts for 3.7% of world coal reserves and 4.1% of global production, which makes it the world’s 6th-largest coal producer (behind China, USA, Australia, India, and Indonesia)

Implications:

  • Fears of the ANC government nationalizing mines to benefit from the high profits in the industry have been tempered by the mining minister recently when he rejected a proposal by ANC’s youth organization to start nationalization. However, the existence of a state owned mining company makes the step to nationalize assets easier in case a future governments has a different opinion.
  • The investment climate for developing reserves and obtaining licenses for foreign companies will only become more challenging now that a local state-owned player is competing for the same opportunities. It will be hard for the South African government to prevent corruption and avoid an image of an unlevel playing field.

©2011 | Wilfred Visser | thebusinessofmining.com