Archive
Mining Week 6/’13: Government actions in South Africa and Argentina
Top Stories:
- Anglo and government clash in South Africa
- Anglo announces mine closures resulting in thousands of job losses in its South African operations. In response the president threatened to review Anglo’s mining licenses, trying to force the company to keep the mines open. Mark Cutifani, Anglo’s new CEO, reacted with fierce criticism of the government’s attitude.
- Mining companies in South Africa see a shift of union membership from the moderate NUM to the more radical Amcu, leading up to further wage negotiations this year.
- Sources: Financial Times; Reuters; Financial Times 2
- Vale and government clash in Argentina
- Vale’s $6bln Rio Colorado potash project in the Mendoza project of Argentina is rumored to be delayed by up to 3 years, mainly driven by large rail investments. Vale announced it is reviewing the project economics and has therefore extended the holiday of the workers, but the company denies the project has been suspended.
- The governor of the province told media that Vale has asked for delay of a sales tax implementation from construction to extraction phase, and argues that this would imply a tax break of $1.5-2.0bln. He also stressed that the government will make sure the project moves forward irrespective of Vale’s plans.
- Sources: Vale press release; Financial Times; Mineweb
Trends & Implications:
- The business environment for mining in South Africa remains very unstable. Not only the government’s ambition to get as much revenue out of mining as possible, resulting in top decile effective taxes, but also the radical approach of unions fighting to increase membership levels, create a situation in which long-term planning for any mining company in the country is almost impossible.
- The business environment in Argentina has deteriorated quickly and appears to move into the direction of nationalization of business quickly. The government tries to get projects going in an attempt to stimulate the economy, but at the same time makes it impossible for companies to repatriate profits from those projects in an attempt to limit inflation. As a result there is no incentive for any foreign company to invest in the country for any short to mid-term gains. In the Rio Colorado case: A delay of the effect of sales tax to the extraction phase is unlikely to reduce tax paid by Vale by $1.5bln, as the company only starts selling its product in large quantities in that extraction phase.
2013 | Wilfred Visser | thebusinessofmining.com
Mining Week 42/’12: South Africa strikes; Glenstrate voting scheme
Top Stories of the Week:
- South African strikes spread; workers fired
- Illegal (wildcat) strikes in South Africa have spread to more or less all major miners in the country. Anglo American’s Kumba iron ore and platinum operations are faced with production disruptions, as are Xstrata, GoldFields, Anglogold, and most other major mining houses in the country.
- South African strikes escalated when police shot down Lonmin strikers. After Lonmin agreed to a 22% wage increase workers in other companies demanded similar increases, bypassing the traditional unions. Several companies are trying to set up structured wage discussions to come to a collective agreement.
- AngloAmerican’s Amplats decided to fire 12 thousand striking workers, which is a fifth of its total workforce.
- Sources: Anglo American press releases1 2; Financial Times 2; wall Street Journal
- Xstrata board recommends Glenstrata deal and complicates voting
- Xstrata’s board of directors issues advice for the company shareholders to accept the merger proposal to form Glenstrata. The voting structure has been set up to assess support for a deal both with and without an extensive retention package for Xstrata’s top management.
- Shareholders will vote first on the merger proposal both including and excluding the retention package, requiring a 75% majority excluding Glencore’s votes. Then the vote on the retention package will be done separately, requiring only a 50% majority of votes.
- Sources: BusinessWeek; Financial Times
Trends & Implications:
- The voting scheme is set up by Xstrata’s board to have a safety net for the deal in case the shareholders don’t accept the management retention package. The Qatari sovereign wealth fund is the largest shareholder that can vote on the merger deal; it has not voiced its opinion on the improved Glencore offer and on the management incentives, but insiders indicate the group considers retention of Xstrata’s officers a key priority. Key unknown in the voting mechanism is whether or not the results of the first two questions (on the merger) are made public before the 3rd vote on the retention scheme.
- The unrest in South Africa is much wider than the mining industry, and as such requires solutions that are much broader than the industry. In the short term a large part of the workers might return to work with a significant increase in wages as demonstrated in the Lonmin case. However, as long as this increase does not span across the industry the workers that have not been given a raise will turn to strikes to stress their demands. The mining houses will have to work nationwide to find a sustainable solution for the industry, which is hard because South African miners operate on the high end of the global cost structure for many commodities. The task is even harder when taking in account that social unrest will continue as long as the issues in related and supplying industries continue.
2012 | Wilfred Visser | thebusinessofmining.com
Mining Week 34/’12: Lonmin labor dispute turns deadly
Top Stories of the Week:
- Fights between police and striking Lonmin workers results in over 40 deaths
- Over 40 miners and several police officers were killed in clashes with the police at Lonmin’s Marikana mine in South Africa, where workers had been on strike for about a week demanding wage increases.
- Competing trade unions trying to ‘control’ the workforce are mentioned as part of the reason the conflicts turned into strikes and violence.
- On August 16th, in the midst of the developments around the violence in South Africa, Lonmin’s CEO was diagnosed with serious illness and is temporarily replaced by the chairman of the board.
- Sources: Lonmin press release; Mining Weekly; Wall Street Journal
- Anglo American finalizes acquisition of 40% stake in De Beers
- Anglo American paid $5.1bln for the 40% stake of De Beers previously owned by the Oppenheimer family. The company now owns 85% of the major diamond producer.
- The deal was announced announced in November of last year; diamond prices have dropped significantly since that announcement.
- Sources: Anglo press release; Financial Times
Trends & Implications:
- The global platinum market is facing significant oversupply, keeping prices low and pushing platinum miners into the red. Lonmin is the highest cost producer among the major producers, putting it in a position in which is can’t keep workers satisfied without pay raises while it can not raise wages without making big losses. Anglo Platinum currently controls approx. 40% of global production in mines in South Africa and Zimbabwe. Various other miners have called on Anglo to cut production to make prices rise.
- The social and political situation in South Africa is causing most international mining companies without strong ties to the country to think twice before investing in the country: high tax rates, active and unpredictable unions, political leaders calling for mine nationalization, and the startup of a ‘national mining company’ result in a very high country risk level.
©2012 | Wilfred Visser | thebusinessofmining.com
Mining Week 18/’12: Vale’s profits down; Asteroid mining up
Top Stories of the Week:
- Vale profits down on
- Vale presented quarterly net earnings of $3.8bln, a 45% drop to last years 1st quarter. Revenues were down by approx. $2bln driven by both price and volume decreases. Slightly increased overall costs combined with lower volumes show an significant increase of unit costs.
- An iron ore price of around $120/t is the current market floor, according to Vale. Many low grade mining operations in China operate at costs around this price, making them go out of business and supply to drop significantly if prices would go below this point.
- Sources: Vale press release; Financial Times 1; Financial Times 2
- Gemcom acquired by Dassault
- Gemcom, one of the premier makers of mine planning software, is bought by Dassault Systems from a group of private equity parties. Dassault pays $360mln, while the private equity parties paid $180mln 4 years ago.
- Dassault has recently set up GEOVIA; a brand ‘to model and simulate our planet’. It is considering adding more packages to the brand.
- Sources: Dassault press release; Gemcom 2008 press release; Financial Times
- Planetary Resources unveils plans to mine asteroids
- Planetary resources, a startup company backed by an impressive list of investors including Larry Page, unveiled its plans to start exploration of asteroids with the objective of mining platinum, iron, nickel, water, and rare platinum group metals.
- An exploration station should be active by 2020. Timeline to bring metals back to earth was not given. Estimates of total investment to start producing start at $2.6bln, similar to the development cost of a large mining project.
- Sources: Wikipedia company info; Planetary Resources company website; Financial Times; Wall Street Journal
Trends & Implications:
- The innovative plans by Planetary Resources underline a growing drive to find alternative methods to obtain raw materials or to find substitutes for the raw materials we often take for granted. If bringing resources from space to the earth would succeed, this could fundamentally change the supply/demand dynamics of our conservative industry. And why would this not succeed? Especially for those materials where global demand is relatively small (e.g. platinum), this initiative should not be deemed impossible. However, futuristic it certainly is.
- Dassault’s move to set up a software branch specialized in the natural resources area is riding the trend of increasing importance of standardization and implementation of software tools to manage the portfolio of remote and often interlinked operations of mining companies. Software can help to produce production per employee, an important driver with the current shortage of qualified miners. At the same time the proper integration of operations and managing large parts of the design and operational work for operations from remote locations drives a need for software innovation.
©2012 | Wilfred Visser | thebusinessofmining.com
Anglo American lifted by commodities boom
“Anglo American has taken advantage of booming commodities prices to boost its interim pre-tax profits by more than two-thirds. A flight to safety among nervous investors has driven up prices for precious metals and diamonds, buoying first-half revenues by more than a fifth at the FTSE 100 miner and prompting Anglo to increase its dividend by 12 per cent.
Strong demand in China has also pushed up prices for iron ore and copper, helping Anglo shrug off the weak US dollar and harsh weather conditions in South Africa and Australia, which included the extensive flooding in Queensland earlier this year.
Anglo has an investment pipeline of $66bn to develop its iron ore and copper mines in South America and coal projects in Australia in order to reap the rewards of booming commodity prices.”
Source: Fincial Times, July 29 2011
Observations:
- Good financial performance was offset by very poor safety performance: the group recorder 10 fatalities in the last 6 months (8 in the platinum business).
- $450mln of the revenues (11%) are achieved in De Beers’ diamond business. Iron ore & Manganese (26%) and Platinum (23%) account for the largest share of Anglo’s revenues. Iron ore & Manganese (29%) and Copper (28%) bring in the largest part of the earnings, driven by particularly high commodity prices.
Implications:
- Focus of Anglo American’s presentation was on expanding production (capex of $2.3bln for 2011H1 with pipeline of $66bln) and on cost control. The company’s operating profit compared to the same period last year suffered from $500mln higher cash costs. Input cost pressures were explained in detail in the investor presentation (see below) For each product the management presented initiatives for cost reduction.
- Iron ore volumes (-12%) and metallurgical coal volumes (-19%) were down compared to the same period in the previous year, caused by weather disruptions that put BHP Billiton and Rio Tinto in the same position. It will be interesting to see the method of reporting the volumes next year if production can go on without interruptions. Higher volumes will then most likely be presented as significant achievements, without any mention of the disruptions of this year.
©2011 | Wilfred Visser | thebusinessofmining.com
Lonmin to invest $2bln to boost production
“Lonmin, one of three South African companies that mine most of the world’s platinum, plans to invest $2bn to restore its production to historic levels of about 1m ounces a year by 2015. In the six months to March, the London-listed miner raised earnings from a low base. Pre-tax profit doubled to $159m despite bigger pay packages for workers, rising electricity costs and the stronger rand which has been eating away at many South African miners’ profits.
Lonmin’s output has declined steadily over recent years, with the miner selling 706,000 ounces of platinum in its year to September compared to over 900,000 ounces in 2004 and 2005.”
Source: Financial Times, May 10 2011
Observations:
- Lonmin currently depends on the Marikana mine for its entire production. The production increase to 2015 should come from this mine. The Limpopo mine currently is under care and maintenance, while the most company’s most promising growth opportunity is the Akanani deposit with just over 10 Moz platinum reserves. Global platinum production is concentrated in South Africa’s Bushveld complex and Russia’s Norilsk region, while demand mainly comes from car manufacturers in Asia and North America.
- Lonmin is suffering from quickly increasing employment costs (8% increase over the year) and electricity costs (24% increase). Furthermore the appreciation of the South African rand makes costs increase while revenues (in dollars) are not equally increasing.
Implications:
- Foreign exchange cost pressures are hurting miners with operations in both developing countries and developed countries in which currencies are not linked to the dollar when the dollar is weakening. With an increasing portion of production shifting to developing countries with high inflation rates exchange rates are becoming more and more important for business evaluation.
- Several large diversified miners are hesitant to take a stronger position in platinum because of safety issues. Most existing projects have poor safety track records, making acquisition of producing assets a CSR-risk, while development of new projects would require significant capital expenditure and result in long lead times.
©2011 | Wilfred Visser | thebusinessofmining.com
Anglo American: Restructured and competitive again
“Anglo American performed strongly in 2010, both operationally and financially, and we have continued to deliver on our clear strategic objectives. In addition to benefiting from higher commodity prices, our focused commodity businesses are driving superior operating performances, through major productivity improvements, disciplined cost management and the benefits of our asset optimisation and global supply chain programmes. We completed a number of sales of non-core businesses during 2010 and into 2011 and our divestment programme is now well advanced. Anglo American’s EBITDA of $12.0 billion, operating profit of $9.8 billion and underlying earnings of $5.0 billion, reflects delivery on all fronts.
We have transformed our Platinum business, moving it down the cost curve, with 23% productivity gains and cash operating costs controlled below inflation, and further safety improvements, while exceeding our refined platinum production target of 2.5 million ounces. Our Kumba Iron Ore, Metallurgical Coal and Nickel businesses also delivered productivity gains, while the benefits of the restructuring of De Beers are clear to see, with the business reaping the rewards of the much improved environment for diamonds.”
Source: Anglo American press release, February 18 2011
Observations:
- Anglo American’s revenue, EBITDA and Earnings per Share outperformed analyst’s average expectations. Contrary to BHP Billiton and Rio Tinto the company managed to keep controllable costs stable while increasing output.
- Capex for the next 3 years is planned at $16bln, below planned investments for the main competitors. However, the company has a strong exploration portfolio, especially in thermal coal, copper and platinum.
Implications:
- The company did announce dividends, but is not yet planning to buy back shares. As the company now holds over $6bln in cash it might be aiming for targeted acquisitions in the near future.
- The high commodity prices of last year have helped all major diversified miners to reduce gearing to low levels (Anglo American now at 16%). The low gearing and the high cash flow from operations will enable the miners to undertake large projects, both in organic growth and M&A.
©2011 | Wilfred Visser | thebusinessofmining.com
China seals African platinum deal
“China is set to make its second largest investment in Africa outside the energy sector by ploughing $877m into South Africa’s platinum industry. The agreement signed last week adds intensity to China’s ambitious drive to sustain its economic boom by securing Africa’s natural resources.
For the first time, Beijing will take a direct stake in the continent’s platinum reserves, the majority of which are in South Africa. Jinchuan, a Chinese state-owned mining company, is to acquire a 51 per cent stake in Wesizwe, a junior South African platinum developer, for $227m (€185m, £158m).
The China Development Bank will then raise another $650m in project finance to develop its flagship Frischgewaagd-Ledig platinum project, near Rustenburg, west of Pretoria. After the mine is built, Jinchuan will take all of its platinum produced, according to a long-term supply agreement.”
Source: Financial Times, May 26 2010
Observations:
- Platinum and paladium are mainly used as catalysts in the car industry and in jewellery. Over 75% of the total production of platinum is coming from South Africa.
- After the investments by Rio Tinto, Chinalco, Vale and CIF in Guinea and Niger last month, this deal signifies the next billion of FDI in the mining industry in Africa.
Implications:
- The involvement of the China Development Bank in this project is special. It increases the buying power of the Chinese (mostly state-owned or controlled) miners even further, accelerating the Chinese control over Africa’s natural resources.
- Demand for precious & rare metals is increasing as many of them are used in high-tech applications. A significant part of the rare metal resources is located in Asia, but China will still increase its efforts of securing access over deposits over-seas. As the diversified miners do not really have an incentive to join this race, high-tech producers from the western world should be looking for ways to secure their supplies of critical inputs in the long term.
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