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 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.”
- 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.
- 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, 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
- 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.
- 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 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
- 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.
- 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
“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
- 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.
- 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’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
- 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.
- 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
“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
- 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.
- 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