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Posts Tagged ‘nickel’

Bulk offers miners some relief

September 23, 2011 Comments off

“The London Metal Exchange, where copper, aluminium, zinc, nickel, lead and tin change hands, is providing minute-by-minute insight to the subsequent share price moves of large mining companies. With LME metals in free fall, the shares of companies such as BHP Billiton, the world’s largest miner by market capitalisation, have followed.

With copper down 8.6 per cent and nickel a hefty 17.5 per cent on Thursday, extending big losses earlier on the week, it is understandable why miners’ shares are tumbling. More could come if LME prices continue to drop, as they are in early Friday trading. But that exclusive focus on LME metals ignores the real cash-cows of the mining sector: iron ore, thermal coal and coking coal. Prices are holding rather well this week.”

Source: Financial Times, September 23 2011

Observations:

  • For London-listed miners the LME-metals account for 33% of earnings, with 53% from iron ore and coal (thermal and metallurgical).
  • Nearly all commodities lost 5% or more of their value in the spot market on Thursday and Friday.

Implications:

  • Falling commodity prices signal doubt about continued economic growth is starting to affect traders, despite miner’s comments that demand is staying strong. The falling premium of lump ore over fines confirms the view that we might be past the peak of prices.
  • Miners will need to decide again about hedging (part of) their production to benefit longer from high prices. Long term supply contracts for bulk materials do serve as a sort of hedge, but metals-prices could also be hedged using derivatives.

©2011 | Wilfred Visser | thebusinessofmining.com

Russia: Silent Mining Giant

June 16, 2011 Comments off

Although Russia accounts for about 14% of global mining, most professionals in the industry know very little about Russian mining. Apart from a few large steel companies most large Russian mining firms are unknown in the market, and few people could name the most important Russian mines or mining districts. However, driven by the huge potential of its reserves and the modernization of its industry the country is slowly gaining a more prominent position on the international mining stage.
This article explores the current situation of the Russian mining industry and identifies two key trends that will shape it in the next decade: a struggle for competitiveness; and internationalization of the key players.

Russia’s Reserves & Production

Figure 1 - Russian mining production and reserves

Russia has been blessed with a large variety of mineral reserves across the country. The peninsulas in the northwest, the Ural mountains, Siberia, and the Far East all house important mining districts. Crucial inputs for economic development, like iron ore and coal, are abundant. The country holds 15-20% of the world’s reserves for these resources. The country’s position in reserves of gold and diamonds is very strong too. For a few minerals with only a small global market, like palladium and magnesium compounds, the country even has the potential of dominating the market. The most important observation when comparing the share of world reserves and the share of current global production is that for almost all key minerals the share of reserves exceeds the share of production (See Figure 1). In other words; it is likely that Russia will become more important in the global mining industry.

Current production in the country is more than sufficient to satisfy domestic demand, making Russia a net exporter of mineral goods. The country’s net export balance for ores, slag & ash was $1.3bln and for iron & steel over $14bln in 2010 (Source: ITC), with China being the largest trade partner for ores and Italy being the primary (initial) destination of Russian iron & steel.

Balancing domestic supply and demand

Russia is growing, and mining is needed to fuel this growth. Russian annual GDP growth varied from 4.7% to 8.1% in the period 2001-2008, outpacing growth in the western world (Figure 2). The economic crisis has hit Russia hard, making the economy shrink by almost 8% in 2009; recovering by 3.8% in 2010. However, growth is expected to outpace western growth in the coming years.

As a result of the high growth of the domestic economy, various industry development could take shape. If productivity increases, the potential of Russian reserves will enable a combination of exports and domestic sales, enabling rapid growth. However, if the Russian companies do not succeed in significantly increasing capacity, productivity will be too low to support both domestic and foreign growth. In this case export restrictions to protect the national growth could be instituted.

Corporate Landscape

The structure of Russia’s current mining production is largely shaped in the Soviet period. Mining districts were set up to provide the country with mineral self-sufficiency decades ago. After privatization in the ‘90s most of the state owned assets have been combined in the current private companies. The privatization and the poor financial situation of the Russian government at the time has led to a typical characteristic of the Russian mining industry: the importance of tycoons. Many private companies are owned and controlled by one or a few founders. These founders were at the right place at the right time and knew the right people at the time of privatization. Their position has further been strengthened by the government’s desperate need for funds, resulting in large amounts of debt being issued to the tycoons.

Figure 2 - Russian and global GDP growth

Whereas company owners in the rest of the world typically try to gain control over companies via the stock market, the large ownership stakes held by the tycoons in Russia lead to frequent power struggles among major shareholders. The struggle for control over Norilsk Nickel is the most recent example: Interros, controlled by Vladimir Potanin, and Rusal, controlled by Deripaska,both try to gain the majority in the board of Norilsk Nickel, one of the world’s largest suppliers of nickel and copper. In the last years the power struggles have led to the emergence of clear domestic champions for most of the key commodities: Rusal for aluminium; Norilsk Nickel for nickel and copper; Suek and Mechel for coal; Alrosa for diamonds; TVEL for uranium, etc. For steel and gold the landscape is (and probably will stay) more fragmented.

Attracting investment

Read more…

Potanin backs Norilsk’s role in Rusal fight

“Vladimir Potanin, the Russian tycoon, has defended controversial actions by the management of Norilsk Nickel during his bitter battle for control of the mining company with rival Oleg Deripaska, insisting that they have protected shareholder value. In his most extensive comments since the conflict flared up again last year, Mr Potanin told the Financial Times that his Interros holding company and Norilsk’s managers were not acting together against Mr Deripaska’s Rusal.

The dispute became public after Rusal ended up with three board directors at last June’s annual shareholder vote, against Interros’s four. The aluminium group accuses Norilsk’s management of manipulating the vote in favour of Mr Potanin’s group.

Mr Potanin said tensions had simmered for six months before June’s shareholder meeting, after Rusal representatives on the board voted against Norilsk’s 2010 budget, demanding it should include big dividend payments.”

Source: Financial Times, May 8 2011

Observations:

  • Despite holding 25% of the ownership of Norilsk Nickel and being on the company’s board, mr. Deripaska has not managed to exert control over the miner. Although Potanin’s Interros does not hold a majority in the board, it can count on the support of Norilsk’s management to control the course of the company.
  • Board composition is depicted below:

Implications:

  • Rusal’s ally Metalloinvest, which holds 4% of Norilsk, is seeking to merge with the company. By trying to increase its share in the open market it could change the voting dynamics in future shareholder meetings to bring control over the company to Rusal’s side, enabling a friendly merger.
  • Deripaska has announced not to sell Rusal’s 25% stake, but Interros will try anything to ensure he will not gain control. One of the current actions of the company to prevent Rusal from gaining control is a share buyback program via Norilsk’s subsidiary Corbiere Holdings. Together with Metalloinvest’s attempts to increase its stake this creates strong demand for the company’s shares.

©2011 | Wilfred Visser | thebusinessofmining.com

Symterra: Inmet, Lundin Merger to Forge Copper Mining Giant

January 19, 2011 Comments off

“Inmet Mining Corp.’s planned merger with Lundin Mining Corp. will catapult the combined 9 billion Canadian dollars (US $9.1 billion) miner among the world’s biggest copper producers as demand for the widely used industrial metal shows no signs of easing.

The combined company, to be known as Symterra Corp., will generate annual production of around 500,000 metric tons of copper starting in 2017, up from around an estimated 205,000 metric tons this year, ranking it among world’s top five senior copper producers. Chile’s Antofagasta PLC is the biggest copper producer, with output of more than 600,000 metric tons estimated for this year.

Inmet and Lundin, both based in Toronto, will combine five copper mines in Portugal, Spain, Turkey, Sweden and Finland with two huge copper projects—Inmet’s 80%-owned Cobre Panama operation, one of the world’s largest undeveloped copper projects with a mine life exceeding 30 years, and Lundin’s 24.8% stake in the Tenke Fungurume mine in the Democratic Republic of Congo. The initial phase of that project calls for a 40-year mine.”

Source: Wall Street Journal, January 13 2011

Observations:

  • Although both headquartered in Toronto, Lundin and Inmet don’t have operations in North America. Most of the current production takes place in Europe, with focus of production in the future shifting to Asia, Africa and potentially Latin America.
  • The market capitalization of both firms is roughly equal at $4.4bln. Inmet has demonstrated a stable performance over the past years with profit margin in the range of 25-50%. Lundin has not been as profitable yet, but has access to the promising Tenke Fungurume project.

Implications:

  • The main driver for the merger is combined spending power for the development of Cobre Panama and Fungurume and the dilution of political risk associated with operation in Papua New Guinea and Congo.
  • Analysts point to the difference in corporate cultures of the two companies as a potential obstacle for smooth integration. The composition of the new board, with Inmet’s Jochen Tilk as president & CEO, indicates that Inmet’s ‘corporate citizenship’ culture might become dominant.

©2011 | Wilfred Visser | thebusinessofmining.com

Jinchuan to Pay $419 Million for Canadian Developer of Tibet Mine

September 20, 2010 Comments off

“Jinchuan Group Ltd. is offering to buy Continental Minerals Corp. for about 432 million Canadian dollars (US$419 million), marking the latest move in China’s buying spree in the global mining sector. Jinchuan would acquire the Vancouver-based mining company—whose board is recommending the deal—at C$2.60 each, representing about an 18% premium to the stock’s average trading price over the last 30 days.

Continental is a junior miner active in Asia, focusing currently on the Xietongmen copper-gold property in Tibet. Jinchuan is an integrated company engaged in mining, concentrating, metallurgy and chemical engineering. It is the largest producer of nickel and cobalt in China.”

Source: Wall Street Journal, September 18, 2010

Observations:

  • Continental Minerals is in the permitting process to obtain mining licenses to start developing a mine that will extract 116 million pounds of copper and 190 thousand ounces of gold in 14 years in the deposit discovered in 2005. Another deposit, named Newtongmen, is in the exploration phase.
  • Jinchuan has been planning to raise money on the stock market for many years. Current plans are to have an IPO in 2011 in order to raise money for expansion and potential further acquisitions.

Implications:

  • The 18% premium offered by Jinchuan indicates that limited synergies are expected to be achieved. Jinchuan is mainly producing nickel and cobalt, while the Xietongmen mine will produce copper and gold, limiting management, trading and processing benefits of the expansion. The company tries to increase its copper output, currently being the 4th largest copper producer of China.
  • It is unlikely that any companies without gold/copper interests in China are willing to bid more for Continental Minerals. High transportation costs from Tibet will force the buyer to process the ore near the mine and customers will mainly be in mainland China.

©2010 | Wilfred Visser | thebusinessofmining.com

Vale in Canadian strike deal

July 8, 2010 Comments off

“Vale, the Brazilian mining group, has reached a tentative deal with the United Steelworkers union to end a bitter year-long strike by 3,000 workers at its nickel operations in Canada.

The main issue in the dispute has been an annual bonus linked to the nickel price that the union accepted during the 1980s in return for giving up annual wage increases. Pensions and job security were also in dispute. …

The settlement was reached with the help of two government-appointed mediators and announced on Sunday evening local time. Ontario’s labour minister met both sides on Friday.

Details of the five-year settlement were not immediately available. Vale said that it would sign comprehensive agreements with the union on Monday. The deal is still subject to ratification by union members. “

Source: Financial Times, July 5, 2010

Observations:

  • Vale acquired Inco for $17.6bln at the end of 2006. Reports of conflicting management styles, leading to many Inco executives leaving the company, have surfaced since.
  • Vale Inco employees started their strike in July 2009 when Vale wanted to change the bonus payment (which is linked to surging nickel prices) and pension plans.
  • Vale Inco is responsible for approx. 1/3 of Vale’s nickel output. The operations in Sudbury were stopped at a time of oversupply in the nickel market, thus leading to a small nickel price effect.
  • The company has not announced a definite deal with the union yet.

Implications:

  • The strike at the Inco operations has been a serious blow to the revenues of Vale in the past year. Nickel price peaked at almost twice the July 2009 levels in early 2010. Getting the operations in Canada back to full operations was therefore a top priority for Vale’s management team.
  • Vale tried to break the strike in various ways, including operations using contract workers. The company will need to find a balance between improving employee relations and restoring competitiveness of the operations.

©2010 – thebusinessofmining.com

Rio Tinto will open Michigan Mine

June 16, 2010 Comments off

“Anglo-Australian miner Rio Tinto PLC Tuesday said it will invest $469 million to build the Kennecott Eagle nickel and copper mine in Michigan after receiving the final environmental approvals for the project.

Rio Tinto plans to produce an average of 17,300 metric tons of nickel and 13,200 tons of copper metal annually over six years from the new mine. Construction of the mine and mill will begin this year and first production is expected in late 2013.

“The long-term demand outlook remains strong for both nickel and copper and bringing Eagle on stream will give us greater benefit from that growth,” said Andrew Harding, chief executive of Rio Tinto’s copper division. “

Source: Wall Street Journal, June 16 2010

Observations:

  • The investment in Michigan is one of the first large mining investments in the area in decades. Michigan’s environmental regulations are among the strictest in the US.
  • The $0.5 bln will be spend on development of an underground mine, rehabilitation of an existing mill and infrastructure.

Implications:

  • Copper and nickel prices have recovered after the crisis, although nickel price recently dropped some 30%. Rio Tinto is clearly convinced the prices will stay above crisis level for an extended period of time, as the new mine will certainly not be a low cost producer.
  • Building the only large scale nickel mining operation in the US, Rio Tinto will certainly benefit from low transportation costs to market on the US East Coast. However, in the longer term competition from African seaborne nickel trade might put this position under pressure.

©2010 – thebusinessofmining.com

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