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Posts Tagged ‘Queensland’

Mining Week 12/’12: Australian tax passed, but BHP warns for demand

March 24, 2012 Comments off

Top Stories of the Week:

  • Australian Minerals Resource Rent Tax finally approved
    • The tax on high profits for Australian iron ore and coal projects which led to a change of premier in the country was finally passed by the parliament last week.
    • Officials from the mineral rich states of Western Australia and Queensland argued that the taxation should be a state arrangement rather than a federal law
    • Many critics expect the MRRT not to bring in the amount of cash the governments expect because of tax management by the largest players and potentially because of lower profit margins as a result of increasing costs.
    • Sources: Economist; Wall Street Journal
  • Mixed signals on China’s iron ore demand
    • In the same week BHP warned that China’s demand for iron ore is slowing down and the Australian state of Western Australia increased its outlook for exports.
    • BHP still is bullish about long term demand in China and does not scale down its investment programs. However, in the short term the company ‘’gives caution” demand might drive down iron ore price to $120/t
    • Sources: Wall Street Journal; BHP Billiton presentation; Financial Times

  • Power struggle for Rusal amidst debt issues
    • A new chairman was appointed to the board of Rusal and his predecessor, mr. Vekselberg, made public that the company was struggling with large debt problems and said it had management problems.
    • Rusal announced that it would write down a large part of the value of its Norilsk stake in an attempt to restructure its balance sheet.
    • Sources: Financial Times 1; Financial Times 2; Lex Video

Trends & Implications:

  • Various of the large Russian miners are trying to diversify both in products and geographic presence. Key problems the companies appear to encounter are a clash of management and corporate governance styles between Russia and western investors and large debt burdens in combination with the need to reinvest most or all of free cash flow to modernize or expand.
  • Australia basically kicked off a wave of mining taxation overhauls in countries around the world. Given the very large output of coal and iron ore operations in the country the implementation of the MRRT will be the most impactful for the overall profitability of the industry. As many of the new tax regimes are based on progressive operating margin scales and operating margins of most companies are decreasing because of cost inflation, it is questionable if the new regimes will result in the income countries are hoping for in the short term.

©2012 | Wilfred Visser | thebusinessofmining.com

GVK Acquires Majority Stake in Hancock

September 19, 2011 Comments off

“The GVK group said Friday it has acquired a majority stake in the Hancock coal project in Queensland, Australia, for $1.26 billion to secure thermal coal supplies for its planned power plants in India. It has acquired a 79% stake in the two Alpha mines, 100% of the Kevin’s Corner mine, as well as full ownership of ongoing rail and port projects connecting the Hancock coal projects.

The Hancock group, led by billionaire Australian businesswoman Gina Rinehart, said in a separate statement that GVK will pay $500 million up-front and the rest in phases. It will pay $200 million one year after the deal closes, and $560 million on the financial close of the coal project, anticipated to be in 2012. The GVK group owns and operates power, airport and other infrastructure projects in India, most of them through its listed entity, GVK Power & Infrastructure Ltd.”

Source: Wall Street Journal, September 19 2011

Observations:

  • GVK secures long term access to at least 20mln tons of coal a year, approx. a quarter of the total planned production of Hancock coal.
  • GVK has coal power projects in India in Punjbab and Goindwal Sahib, and owns 2 small coal mining projects in the state of Jharkhand (Tokisud and Seregarha).

Implications:

  • Indian companies are increasingly looking abroad to secure coal access. Both thermal coal and metallurgical coal are in demand, as coal mining capacity does not keep up with high economic growth.
  • For Hancock the sale of the coal projects frees up cash to develop the current project further and to pursue other opportunities more aggressively. Next to Hancock coal the group is involved in the Hope Downs iron ore project and the Jacaranda Alliance Joint Venture.

©2011 | Wilfred Visser | thebusinessofmining.com

Macarthur backs Peabody-Arcelor offer

August 30, 2011 Comments off

“Macarthur Coal has backed a sweetened takeover bid from Peabody Energy of the US and European steelmaker ArcelorMittal that values one of Australia’s last remaining big independent coal miners at A$4.9bn (US$5.2bn). The recommendation by the Macarthur board came after PEAMCoal, a new entity owned by the bidders, lifted its offer price to A$16 a share from A$15.50. Macarthur shareholders are also entitled to a recently declared dividend, taking the total price to A$16.16 a share.

Barring a higher offer from a rival suitor, Tuesday’s agreement all but ends a protracted takeover tussle for Macarthur among multiple parties spanning more than a year. Macarthur said unnamed potential suitors had examined its books since PEAMCoal made its initial A$15.50-a-share offer, but ‘although it remains possible that a superior proposal might be made, none have emerged to date and there can be no assurance that any will emerge.’”

Source: Financial Times, August 30 2011

Observations:

  • PEAMcoal’s new bid is $0.50/share higher than the initial offer, adding some $0.2bln to the transaction value. The current bid is almost $2.0bln higher than Peabody’s offer in May 2010.
  • Macarthur agreed to a $51.4mln break-up penalty (1% of takeover price) and no shop/no talk clauses, making it hard for other parties to obtain detailed company information. However, various other potential bidders have already studied Macarthur’s books.

Implications:

  • By agreeing to PEAMcoal’s bid Macarthur’s board pressures potential other parties to hurry up. Anglo American is rumoured to be interested in bidding for the company, but no official rival bids have been made yet. As most interested parties have been in contact with Macarthur and studied the books already, the no talk clause is not very important, but Macarthur signals a decision has to be made quickly.
  • Key assumption in the valuation of Macarthur clearly is the coal price going forward. Synergies vary among potential bidders, but synergy value will be much lower than the value of the stand-alone cash flows of the company. As a result the company with the most optimistic forecast of the coal prices will be willing to pay most for Macarthur. This concept, in which the winner of an auction (or takeover process) runs a high risk of being too optimistic, is known as ‘the winner’s curse’.

©2011 | Wilfred Visser | thebusinessofmining.com

BHP faces more industrial action at coal mines

June 27, 2011 Comments off

“BHP Billiton Ltd. is facing a third round of industrial action in Australia this week at its coking coal mines, further disrupting output from the world’s largest exporter of the steelmaking material.

Workers at seven mining sites owned by BHP Billiton Mitsubishi Alliance in Queensland state’s Bowen Basin won’t do any “non-rostered” overtime on June 30 and July 1, Stephen Smyth, a division president at the Construction, Forestry, Mining and Energy Union in Queensland, said by telephone today.

Coal mine workers began their second round of strikes on June 24 and they’ll finish on June 29, said Smyth. BHP has been notified about the latest plan and further strikes are possible next week, he said.”

Source: Bloomberg, June 27 2011

Observations:

  • Over 3,000 workers at the BMA coal mines are campaigning for better contract rights for contracted workers and to retain the union’s power in recruiting decisions.
  • BMA is using a contract workforce to minimize loss of production caused by the strikes. Lost production could be up to 130Kt per day, or just over an average ship of export capacity.

Implications:

  • Negotiations are progressing slowly, and will continue to do so as long as production continues. If the unionized staff manages to convince the contract workers (roughly 50% of personnel) to lay down the work the pressure on BMA management would increase.
  • Various other miners in similar situations have shut down operations, fired the staff, and rehired the loyal staff members on own terms. BHP certainly will try to prevent this situation, as it would hurt the company’s reputation as a top employer.

©2011 | Wilfred Visser | thebusinessofmining.com

BHP Coal Workers Open Door to Strike

June 3, 2011 Comments off

“BHP Billiton Ltd. faces the possibility of strike by thousands of coal workers in Australia’s resource-rich Bowen Basin following a vote by members of three unions. In a ballot that took place in recent days and was counted Friday, roughly 90% of workers voted to give their unions the right to call a strike, Stephen Smyth, district president of one of the three, the Construction, Forestry, Mining and Energy Union, told Dow Jones Newswires. Samantha Stevens, a spokeswoman for Melbourne-based BHP, confirmed the ballot supported a possible strike.

The company continues to meet with the unions to complete negotiations on a new labor agreement, she added, and the two sides have scheduled meetings through the end of July. ‘We continue to make solid progress and as such, industrial action would be premature,’ Ms. Stevens told Dow Jones.”

Source: Wall Street Journal, June 3 2011

Observations:

  • BHP Billiton employs approximately 4,000 people in metallurgical coal operations and approximately 8000 in energy coal operations. In average across all of the companies operations the company has approximately as many contractors as own employees on-site.
  • This would not be the first time a strike at BHP’s coal operations takes place: in 2000 the employees at various mines stopped work. Prior to the changes that led to these strikes the company was perceived to be more friendly to unions than competitors.

Implications:

  • BHP BMA is trying to gain greater flexibility in setting contracts for contract workers separate from the collective agreement and is at the same time trying to limit the power of unions in recruiting decisions. While the potential financial benefit of the first issue could justify a couple of days of lost production, the short term benefit for the second issue will not be enough for the management to risk a strike. Thus the recruiting issue might be used as a tradeable by the negotiators.
  • An important underlying frustration in the negotiations is BHP Billiton’s push to introduce more stringent Fly-In-Fly-Out rosters. The struggle to find enough employees willing to either live in the outback or leave home for multiple nights each week is one of the major HR challenges of mining in Australia in the next decades.

©2011 | Wilfred Visser | thebusinessofmining.com

Whitehaven ends talks with potential bidders

May 16, 2011 Comments off

“Whitehaven Coal of Australia has ended talks with potential suitors from Asia and the US after a near-seven month auction failed to elicit a ‘sufficiently attractive’ proposal that it could recommend to shareholders. The collapse of the auction saw Whitehaven’s shares fall as much as 16 per cent to A$5.43 before they recovered to close down 80 cents at A$5.63. The group declined to comment on reports it was seeking offers of at least A$7 a share, valuing its business at A$3.5bn.

China’s Yanzhou Coal, which paid A$3.5bn for Australia’s Felix Resources in 2009, was one of a handful of parties interested in Whitehaven, together with Korea Resources Corp, the South Korean state-owned company. Aditya Birla Group, the Indian conglomerate, and Peabody Energy, the US coal group that failed in its attempt to buy Australia’s Macarthur Coal last year for A$3.8bn, were also understood to have examined a bid for Whitehaven.”

Source: Financial Times, May 16 2011

Observations:

  • A Korean consortium led by Kores launched the only published bid for Whitehaven in February. Whitehaven started an auction procedure after being engaged by other potential bidders. It now appears none of the auction participants is willing to offer a satisfactory price.
  • The recent rise of the australian dollar makes the purchase of Australian assets less attractive. Commodity markets are setting prices in American dollars, while Whitehaven’s costs are mainly in Australian dollars. As a result, costs increase without revenues going up by the same ratio.

Implications:

  • Both the Australian and the American coal mining sectors are going through a wave of consolidation. However, the Australian market is less fragmented, leaving fewer opportunities for interesting mergers.
  • The key driver for consolidation in North America is cost pressure and the access to export capacity, while the drive by Asian steelmakers to secure supplies of coking coal are the key driver for the same movement in Australia (and South East Asia).

©2011 | Wilfred Visser | thebusinessofmining.com

Steel price rise stokes inflation concerns

January 17, 2011 Comments off

“The price of steel has risen more than a third in two months, adding to global inflationary pressures as food and energy costs are also soaring. Floods in Queensland have severely disrupted global supplies of coking coal, a major steelmaking ingredient, prompting a scramble among manufacturers to stock up on steel.
That has pushed the price of benchmark US hot-rolled coil steel 37 per cent higher since early November to a two-year high of $783 a tonne, said CRU, a consultancy.

Spot cargoes of coking coal have traded as high as $350 a tonne – up 55 per cent from quarterly contracts agreed at $225 just a few weeks ago. Iron ore, the other major ingredient in steel, is rapidly rising towards record high prices, with benchmark grades delivered to China up 20 per cent since the start of November at $178.30 a tonne.”

Source: Financial Times, January 16 2011

Observations:

  • In the interview on the FT-site Edward Hadas places the coal supply disruptions in Queensland due to weather conditions in the context of global commodity price increases over the past months. Key drivers for the continuing price increase are the increasing demand from China and India; the access to cheap money that fuels the demand; and the general shortage on the supply side, which has temporarily been increased by flooding.
  • Hadas argues that only some 20% of the global commodity trade volumes are affected by the weather conditions. This includes commodities like coffee and tea, for which production is much more susceptible to weather conditions than for mined commodities.

Implications:

  • Although the extreme weather conditions have a definite short term impact on coal and iron ore prices, they will not change the pricing in the long term. However, increased occurence of extreme weather conditions due to climate change will certainly make global commodity markets more volatile.
  • The transition to a quarterly pricing system for iron ore will enable the iron ore miners to rapidly pass on increased costs to the steel makers, further increasing the raw material costs.

©2011 | Wilfred Visser | thebusinessofmining.com

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