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Posts Tagged ‘Oyu Tolgoi’

Mining Week 04/’12: First test for Vale’s CEO vs. Brazilian government

January 29, 2012 Comments off

Top Stories of the Week:

  • Vale starts to fight back against tax rulings
    • Vale announced its plans to appeal to the governments intent to charge $5.6bln worth of taxes on foreign earnings. The clash with the government promises to be the first real test for the new CEO Murilo Ferreira.
    • Mr. Ferreira took over the leadership of the company from Roger Agnelli, who was not reelected partly based on a disagreement with the government (which is control Vale via state-controlled shareholders) over $2bln taxation.
    • Sources: Vale press release; Financial Times; Bloomberg
  • Rio Tinto assumes full control of Oyu Tolgoi

Trends & Implications:

  • Vale estimates the impact of a review of the tax code on the company’s earnings to be approx. 4-5% of earnings. Taxation regimes around the world for specifically iron ore and copper mining are reviewed to make the countries benefit more from ‘extreme’ profits, which could be seen as a temporary phenomenon. However, the key issue in Vale is facing now is a debate about double taxation; paying taxes over profits after taxes realized in countries where the company is operating.
  • Rio Tinto’s control over Ivanhoe will help the company to put in place its management structure and have the project managed by some of its top project developers. Gaining full control of the project in this stage will help Rio Tinto to build the project according to the company’s standards, preventing costly and above all time-consuming future transitions in the operating structure. The global standards that enable effective project management more and more set the world’s largest miners apart from the ‘small’ mining firms with only a few operating assets. Very much like GE has become known as a great ‘project management company’, the world’s largest miners are more and more developing into ‘mine development’ companies in which development speed is the key success factor and navigating politics in developing countries is a key skill.

 

©2012 | Wilfred Visser | thebusinessofmining.com

Mongolia’s future as commodities exporter

May 24, 2011 Comments off

“Mongolia is going to be a major future supplier of commodities from coal through gold to copper – and maybe even crude oil. But how soon will this landlocked country with a population of 3m really begin delivering these resources to the world in a significant, market-moving way?

Although Mongolia is located right next to its biggest customer, China, their history of rivalry makes Mongolia suspicious of its southern neighbour. And capricious politics – parliament has tried to oust Dashdorj Zorigt, minister for mineral resources and energy, twice this year – mean that economic logic is sometimes subordinate to politics or nationalism.

Take the development of Tavan Tolgoi, by some calculations the world’s second-largest coal deposit. The government recently scrapped plans to build a railway directly to the border, less than 300km away, even after feasibility studies and initial permits for the line had been granted. Instead a new line will go east, connecting the mines to the Trans Mongolian Railway that leads to both Russia and China, albeit by a longer route. …

There are some exceptions to this pattern: the Oyu Tolgoi mine, which is co-owned by Rio Tinto, Ivanhoe and the Mongolian government, is ahead of schedule and will come online next year. The copper and gold produced there will be shipped out by truck, posing fewer logistical difficulties than the bulky coal. But still, the investment agreement governing the mine took more than five years to negotiate and remains a source of intense political debate.”

Source: Financial Times – Commodities Note, May 20 2011

Observations:

  • Tavan Tolgoi holds estimated coking and thermal coal reserves of 6.4bln tons. Indian ICVL has expressed interest in buying into the project, which the Mongolian government wants to bring to the stock exchange.
  • Rio Tinto’s development of copper and gold deposit Oyu Tolgoi with/through Ivanhoe is the first major foreign investment project in the country, which appears to go smoothly so far. Rio Tinto’s shareholder Chinalco has repeatedly indicated it would like to take part in the project, but has been kept out by Rio Tinto to date.
  • In October last year Ivanhoe was still hoping to export the products from Oyu Tolgoi by rail. In current plans the transport to the Chinese border (80 kilometers) will initially take place using trucks.

Ivanhoe's Oyu Tolgoi logistics plan

Implications:

  • Western companies will try to tease the Mongolian government into collaborating in the construction of direct rail links to the Chinese rail network in the south. The government’s objective in linking the producing region to the Trans-Mongolian Railway mainly is to stimulate domestic processing industry and to gain political leeway in the relationship with China by having the option to supply to Russia. Most likely the corporates and the government will come to a compromise in which the costs of infrastructure development is shared in some way.
  • The elections in Mongolia next year could create a complicated situation for the western miners in the country, as any new government will try to review and/or renegotiate development and royalty deals currently in place.

©2011 | Wilfred Visser | thebusinessofmining.com

Chinalco not planning to sell Rio Tinto stake

April 5, 2011 Comments off

“Chinalco, the Chinese aluminium group, has no plans to sell down its shares in Rio Tinto, viewing the mining house as a key strategic partner as Chinalco expands overseas. ‘We can’t go out to fight alone,’ said Chinalco chairman Xiong Weiping, explaining that co-operation with global miners was essential for overseas development. ‘With Rio being one of the top mining companies in the world, Chinalco can learn a lot from them, including in operational management, asset operation and risk management.’

Chinalco is seeking to move into mining to take advantage of the commodities bull run that has been created by China’s huge demand for raw materials such as iron ore, copper and coal. Mr Xiong outlined their plans to expand from their core aluminium business, which has struggled to make profits, into a global mining house. He said he was hunting for high-grade copper, bauxite, iron ore and coal resources, the minerals that China needs to fuel its urbanisation. ‘Our target areas are mainly countries next to China, for example south-east Asia, Mongolia and central Asia,’ said Mr Xiong.”

Source: Financial Times, April 3 2011

Observations:

  • Aluminum Corporation Of China Limited, Chinalco, and Chalco are often used interchangeably, as they are basically the same company. Chinalco is the state-owned holding company of Chalco, which is listed on various exchanges with a small part of ownership.
  • Chinalco signals its interest in partaking in the Oyu Tolgoi copper project in Mongolia, which is operated by Rio Tinto. Until now Rio Tinto has held away potential contributors to the project.

Implications:

  • With China’s mining sector growing in international importance it would be no more than logical if some of the largest diversified miners in the world in 10 years time are from China. In the domestic struggle to be this player state support will be crucial. Chinalco is positioning itself to be the Chinese diversified miner and desperately needs strong international connections to support this claim.
  • In the short and mid term the strategic stake of the company in Rio Tinto certainly is a symbiotic relationship, as demonstrated by investments in Africa and exploration partnership in China. However, if Chinalco grows into an international diversified miner as it is planning, in the long term the companies will become fierce competitors. At this point the stake in the Australian company will certainly cause conflicts.

©2011 | Wilfred Visser | thebusinessofmining.com

Rio moves closer to Ivanhoe takeover

December 9, 2010 Comments off

“Rio Tinto has moved closer to taking over Canada’s Ivanhoe Mines, owner of a vast Mongolian mining project, after Rio pledged up to $4.3bn in a multi-pronged financing deal that will boost Rio’s stake in Ivanhoe to 42 per cent from 35 per cent. Rio and Ivanhoe, the vehicle of mining entrepreneur Robert Friedland, also suspended arbitration surrounding their joint development of Oyu Tolgoi, a deposit that is expected to be one of the world’s biggest new sources of copper and gold.

In a complex agreement reached on Wednesday Rio will finance the completion of Oyu Tolgoi in exchange for options that allow it to raise its equity stake in Ivanhoe to 49 per cent by January 2012. In that month the 49 per cent shareholding cap lapses, allowing Rio to buy additional shares. Ivanhoe shares fell 13 per cent in early Toronto trading, as the prospect of an alternative buyer for Ivanhoe receded.”

Source: Financial Times, December 8 2010

Observations:

  • In July of this year Rio Tinto announced its intention to take control of the Oyu Tolgoi operation by increasing its share in Ivanhoe. However, the board of Ivanhoe made it hard for the company to gain a majority stake of the company.
  • The company is in full development of the operation in Mongolia, planning to start production in 2013. However, to have good access to the Chinese market the rail infrastructure connecting Mongolia and China needs to be improved.

Implications:

  • Most likely Rio Tinto will increase its stake of Ivanhoe rapidly after January 2012, as the Oyu Tolgoi deposit promises to be highly profitable if current copper price levels persist.
  • For some time rumors about potential involvement of an additional Chinese investor for the mine were going around. However, though strengthening ties with the Chinese industry and government last month, Rio has indicated to prefer developing the deposit without additional support.

©2010 | Wilfred Visser | thebusinessofmining.com

The ‘Natural Resource Curse’ in Mongolia

October 29, 2010 Comments off

“Mongolians were until recently wont to describe themselves as “beggars sitting on a huge pile of gold”. The country has vast but largely untapped mineral deposits. Until recently wages were low and jobs scarce. Shoppers in Ulan Bator, the capital, were not spoilt for choice—unless they were in the market for dried meat, vegetables or furry hats.

But with the recent launch of several big mining projects, a transformation looms. It will present the government with a different set of problems: how to manage a promised economic boom without devastating the environment or destabilising either the economy or the nation’s fledgling democracy.”

Source: The Economist, October 21 2010

Observations:

  • Mongolia had a GDP of of $9.4bln in 2009. The benefits for the country from the Oyu Tolgoi copper deposit and the Tavan Tolgoi coal deposit will add many billions to the GDP, turning the trade deficit into a significant surplus.

Implications:

  • The natural resource curse implies that the abundance of natural resources in a country hinders the development of stable government organizations, as it provides a reason for corruption and promotion of weak legislation. Mongolian government is trying to escape from this curse by strengthening anti-corruption legislation, taxation policies and by improving transparency of the dealings with foreign companies.
  • Foreign mining companies investing in Mongolia (Ivanhoe, Rio Tinto and potentially Chinese partners) clearly need political stability. Key part of their entry strategy will have to be a non-market strategy: aiding the government to institute legislation, penalize corruption and build infrastructure. Reducing the risk of the projects in the long term is worth a good deal of money, given the foreign capital expenditure of over $4bln.

©2010 | Wilfred Visser | thebusinessofmining.com

Mongolia confident IPO will ease doubts

October 8, 2010 Comments off

“Mongolia’s pitch to become the new frontier for metals and mining is facing renewed scrutiny from investors around the world as a Mongolian coal miner completes a landmark listing in Hong Kong.

Mongolian Mining Corp (MMC) is set to raise at least $650m after pricing its shares on Tuesday in Hong Kong in the middle of a target range set by advisers JPMorgan and Citi.

The initial public offering, representing 20 per cent of the company’s equity, creates the first homegrown, multibillion-dollar miner in a country that possesses little capital or infrastructure, but vast deposits of coal, copper and gold.”

Source: Financial Times, October 5 2010

Observations:

  • MMC holds the license to part of the enormous Tavan Tolgoi coal field. The government says this field is perfectly suited to export coal to the Chinese market. The government is planning to sell 50% of the ownership of the deposit to investors.
  • Tavan Tolgoi is located in the south of Mongolia, in the same area as Oyu Tolgoi, a copper deposit partly owned by Rio Tinto via Ivanhoe Mines.

Implications:

    Potential infrastructure - Ivanhoe explanation

  • In order for foreign investors to invest in the coking coal deposit, the government will need to invest heavily in infrastructure. Both transportation to the mine (and from the mine to China) and availability of water in the region are concerns the government will have to answer to.
  • Cooperation between the develop of Tavan Tolgoi and Oyu Tolgoi by extending the required 290km railway connecting Oyu Tolgoi to the Chinese rail network to the Tavan mine appears to be inevitable.

©2010 | Wilfred Visser | thebusinessofmining.com

Ivanhoe escalates Rio Tinto dispute

July 15, 2010 1 comment

“A dispute between Rio Tinto and Canada’s Ivanhoe Mines over a Mongolian copper and gold mine escalated on Wednesday when the Vancouver-based company suggested it was opening the door to “third-party strategic investors

Ivanhoe said its board voted on Tuesday to terminate a clause in a 2006 pact between the two companies that prevents Ivanhoe from issuing more than 5 per cent of its shares to third parties.

The move means Rio, the financier of the Mongolian mine at Oyu Tolgoi near the Chinese border, faces the threat of dilution of its holding in Ivanhoe or the possibility that another miner may gain a foothold on the project. Rio said it was ‘very confident of its existing rights under the private placement agreement with Ivanhoe [from 2006]’. However, on Monday, the Anglo-Australian miner launched arbitration against Ivanhoe over an earlier complaint.”

Source: Financial Times, July 15, 2010

Observations:

  • Rio Tinto is owning part of the Oyu Tolgoi project, one of the richest undeveloped copper deposits in the world, via its stake in Ivanhoe.
  • A special agreement between Rio and Ivanhoe enables Rio to increase its take in the project by exercising warrants to increase Ivanhoe ownership. However, the agreement prevents Rio from obtaining a majority stake in the Mongolian project until 2011.

Implications:

  • Rio Tinto clearly wants to gain control over the development and operation of the new copper mine, which will enable the company to provide secure access to copper for the Chinese market. The company will try to buy additional shares of the project as soon as possible after the agreement with Ivanhoe expires.
  • Ivanhoe management will be driven by hopes to retain as much control as possible over the project and at the same time tries to increase the value of its stake and shares to gain more from Rio’s attempts to buy control. Inviting other companies to buy parts of Ivanhoe will increase the price Rio will eventually have to pay to buy a majority share.

©2010 – thebusinessofmining.com

Rio Tinto confirms Mongolian mine interest

July 9, 2010 Comments off

“Rio Tinto has ended months of speculation by confirming plans to swap its shares in Ivanhoe Mines for a direct stake in Mongolia’s Oyu Tolgoi copper and gold project, which is 66 per cent owned by the Canadian miner.

Rio owns an indirect interest in Oyu Tolgoi, one of the world’s largest undeveloped copper deposits, through its 29.6 per cent stake in Ivanhoe.

The group also confirmed in a US Securities and Exchange regulatory filing on Wednesday that Chinalco, the Chinese aluminium producer that is its largest shareholder, was interested in investing in the Mongolian project, either directly or through buying an equity stake in Ivanhoe.

The end result of the talks could be a two-way or three-way agreement between Ivanhoe, Rio and the Chinese company, Rio said in the filing.”

Source: Financial Times, July 8, 2010

Observations:

  • Rio Tinto could increase its stake of the Oyu Tolgoi operation to 47%, leaving Ivanhoe with 19%. 34% of the remaining shares are owned by the Mongolian government.
  • The mine is planned to start operation in 2013, helping Rio Tinto to secure access to copper volumes, one of the key priorities in the company’s portfolio balancing.

Implications:

  • Teaming up with Chinalco would both enable Rio Tinto to undertake more development projects with its restrained $5bln capital budget for the year and would strengthen the ties with Chinalco. Rio’s management has been working on strengthening the links with the Chinese state controlled company since early 2009.
  • Rio Tinto is clearly more interested in Oyu Tolgoi than in the other Ivanhoe assets (Ovoot Tolgoi coal operations, Kazakh Kyzyl gold, Mt. Isa & Tennant Creek). As takeover options for Ivanhoe are limited, gaining direct control over Oyu Tolgoi appears to be the best option to increase control over operations.

©2010 – thebusinessofmining.com

Top 10 Priorities of Rio Tinto’s CEO Tom Albanese

June 28, 2010 1 comment

In the series of specials on the priorities of the CEOs of the world’s leading mining companies we analyze Rio Tinto this time. What is top of mind for Rio’s CEO Tom Albanese?

Tom Albanese

An analysis of Rio Tinto’s latest annual report; 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 Albanese’s 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 the lobby on the new Australian mining tax. Number 2 is restoring the operating margin of the company. The list closes with resetting the focus of the exploration program. Read on for the full list of priorities.

 

Priority 1 – Lobby against Australian mining tax

Although prime minister Kevin Rudd has been replaced by Julia Gillard, the negotiations about the reformation of the Australian mining tax system stay the top priority for mr. Albanese. If the super profits levy proposed by mr. Rudd would be implemented without changes (which is very unlikely at this point), Rio’s profits would take a hit of approx. 20%. As part of the tax discussions Rio Tinto is re-assessing its portfolio of development projects in Australia, as the feasibility of many projects is endangered by the tax.

Priority 2 – Restore operating margin

The operating margin of the company has decreased most of the large diversified miners, down at less than 20%. Especially in the diamonds and minerals unit major cost cutting needs to take place. Furthermore, the transformation of the aluminium business is to continue to take out more costs.

 

Explore the revenue, profit & margin data at Wikinvest

Priority 3 – Achieve ‘A’ credit status

The balance sheet has been strengthened significantly in 2009, but achieving the ‘A’ credit status remains top priority for the CFO in order to ensure access to capital in the near future. “Prudent balance sheet management” and a “complete review of trading security practices” are mentioned as key issues for 2010.

Priority 4 – Sell Alcan packaging food

Rio undertook a major divestment program of non-core assets to strengthen the balance sheet. It did succeed in collecting $8bln already, but still wants to bring more cash in by selling the remainder of the packaging food division of Alcan for some $2bln.

Priority 5 – Complete Pilbara Iron ore JV

The enormous Western Australian iron ore operations, for which a Joint Venture with rival BHP Billiton has been designed, are getting ready for large scale production. However, the JV is still subject to competition authority analysis. The Australian watchdog will decide end of July, but other countries will be investigating much longer. Getting the Pilbara operations on steam is crucial for Rio’s iron ore supply position to China.

Priority 6 – Develop M&A Decision scenarios

The share price of his company will be a major concern for mr. Albanese. The market capitalization has not really recovered after the first hit of the crisis. The low prices in the industry enable many strange merger and acquisition moves. Albanese survived the acquisition effort by BHP Billiton started late 2008, but will need to be prepared for potential new moves.

Priority 7 – Strengthen relationship with China

A revolutionary deal with Chinalco involving $20bln investment by the Chinese collapsed in June 2009 as shareholders did not support the board’s intentions. With China being the single most important country for development of Rio, which is very dependent on iron ore exports, Albanese will have to find other ways to build relationships with the key decision makers in the country.

Priority 8 – Manage capital projects portfolio

Rio is planning to invest only some $5bln in 2010. However, the projects on which the money will be spend are of strategic importance to the company. Extension of Diavik diamond mine, Building of the AP50 aluminium plant, and development of Oyu Tolgoi Copper mine in Mongolia are the most important capital projects in the development phase.

Priority 9 – Improve operational delivery

Where cost cutting is one of the top priorities, increase output volumes is another key issue. Especially the output of the aluminium operations has been disappointing in recent years. Albanese will be closely monitoring the delivery excellence programs in Madagascar (new industrial minerals asset), Queensland (Clermont thermal coal and Kestrel coking coal) and the aluminium business unit.

Priority 10 – Focus exploration program

Finally, Rio’s exploration program needs renewed focus, mainly in the areas of iron ore and copper. The new Mongolian asset and a potential Bingham canyon extension could secure copper output for some time. The difficult relationship with Guinean government very much increases the need to find new iron ore, as the Simandou development can not be expected to be finished quickly.

Sources: Rio Tinto annual report 2009, Rio Tinto annual review 2009, Rio Tinto investor presentation February 2010

©2010 – thebusinessofmining.com