Archive
Mining Week 39/’12: Fortescue moves on; GlenStrata almost there
Top Stories of the Week:
- Xstrata’s board votes October 1st on Glencore offer
- The decision by Xstrata’s board on whether or not to endorse Glencore’s new bid for the company is delayed by a week to October 1st. The endorsement might help to convince a majority of shareholders to accept the offer for 3.05 shares of Glencore per share of Xstrata.
- The debate around generous retention packages for Xstrata’s key managers started again as several large shareholders voiced their discontent. Glencore stressed nothing will change to those packages unless Xstrata’s board wants to adjust them. Finding a compromise to satisfy the key shareholders might be the final step for the board to make the deal happen.
- Sources: Wall Street Journal; Financial Times 1; Financial Times 2
- Fortescue solves debt problems by refinancing $4.5b debt
- Fortescue announced refinancing of $4.5bn debt with Credit Suisse and JP Morgan as underwriters. Debt maturity of the new deal is 5 years. The company was facing liquidity problems as low iron ore prices and aggressive investment schedules were undermining its ability to repay debt.
- Sources: Wall Street Journal; Fortescue announcement
- Oyu Tolgoi waiting for power
- Rio Tinto’s Oyu Tolgoi mine is 97% complete, but negotiations with Mongolian and Chinese governments on power supply delay startup. Oyu Tolgoi built 220Kvolt power line to connect to the Chinese grid, but can’t sign a offtake agreement without consent of the Mongolian government
- Sources: Financial Times; The Australian; Project website
Trends & Implications:
- Oyu Tolgoi’s trouble to get powered is just one example of the challenges many large operations face to secure affordable power supply. The power requirements of a large operation require a significant change and development of power grids of many developing nations. Generation capacity is typically not readily available and the large offtake trigger discussions about long term price agreements.
- After meeting with Glencore’s board this week, Xstrata’s board appears to be working hard to make the merger/acquisition go ahead. It is hard to imagine another outcome in which Xstrata’s shareholders get more value for their company, making it likely they will accept the offer. If the deal is approved by Xstrata’s shareholders, the changes in holdings various large investors will likely make will give an interesting insight into the clientele effect the integration of a mining house and a commodity trader could have.
2012 | Wilfred Visser | thebusinessofmining.com
Mining Week 28/’12: GlenStrata in doubt
Top Story of the Week:
- Xstrata vote on merger with Glencore delayed
- The vote by Xstrata shareholders on the proposed merger between Xstrata and Glencore, originally scheduled for July 12th, has been delayed to a yet to be announced date.
- Several large shareholders, including Qatar Holding, which holds approx. 11% of the shares, have threatened to try to vote against the deal if the exchange ratio of 2.8 shares of Glencore per Xstrata share is not sweetened. Xstrata’s shareholders have a very strong voice in the deal because Glencore can’t use its 35% of the voting rights. As a result a small group of only some 15% of the shareholders could block the deal.
- Under pressure of shareholders the proposal of cash retention bonuses for Xstrata executives was adjusted to stock only payments. The planned retention measures were made part of the vote on the merger and threatened to become an obstacle to the approval of the deal
- The Australian antitrust authorities approved the proposed deal last week, judging that the combination would not be big enough to distort market efficiency. European Union, Chinese, and South African regulators still have to give their judgement.
- Sources: Xstrata press releases; Financial Times; Wall Street Journal
GlenStrata timeline
©2012 | Wilfred Visser | thebusinessofmining.com
Mining Week 25/’12: Whitehaven buyout options; Mine 2012
Top Stories of the Week:
- Whitehaven rejects initial offer from largest shareholder
- Tinkler, largest shareholder of Whitehaven with over 20% of shares, is trying to arrange financing to buy the full group. An initial approach was rejected by Whitehaven as financing of the bid was not deemed solid.
- Whitehaven became Australia’s largest listed coal group last year after taking over Ashton. Share price dropped approx. 30% over the past 2 months, making the company an attractive buyout target
- Sources: Wall Street Journal; Financial Times; Reuters
- PWC launches ‘Mine 2012’
- Consultancy PWC recently published its annual study on the key industry trends in the mining industry, focusing on the 40 largest mining companies. This year’s report is titled ‘the growing disconnect’, zooming in on the paradox between the need to build new projects to increase supply and the reluctance by shareholders to have their companies commit funds to investment.
Record historical results, high commodity prices, and a bullish outlook shared by many miners continues to underline the industry’s strong fundamentals. But investors’ reluctance to emerge and support growth plans points to a growing disconnect between the market and the mining industry.
Source: PWC
Trends & Implications:
- PWC identifies the following key trends in their report:
- Increased volatility is here to stay
- Long-term demand fundamentals remain robust …
- … but supply will be the industry’s real challenge going forward
- Structural changes to the cost base
- Changing fiscal regimes and resource nationalism
- Capital expenditure requirements
- Can’t bring it on fast enough
- The report presents the numbers around investment and use of cash for the Top 40 mining companies: $98 billion was invested in capital projects in 2011 and plan for a further $140 billion for 2012. At the same time share prices have decreased across the line. PWC argues 2011 marks the start of the growing disconnect.

©2012 | Wilfred Visser | thebusinessofmining.com
Mining Week 19/’12: Week of the Investors
Top Stories of the Week:
- Xstrata’s investors voice GlenStrata concern
- In the re-election of Xstrata’s directors the vote against re-election of Ivan Glasenberg, the head of Glencore, increased from 3.6% last year to 13.6% this week.
- When voting on Glencore’s takeover offer for Xstrata a group of approx. 17% of shareholders could block the deal as 75% of shareholders excluding Glencore’s 33% needs to support the deal.
- Mr. Glasenberg indicated most of the debate on the merger currently is about the share ratio, which Glencore currently offering 2.8 shares per share of Xstrata.
- Sources: Financial Times 1; Financial Times 2; Xstrata shareholder meeting results; Xstrata notice on Quatar shareholding
- BHP Billiton and Rio Tinto return cash rather than invest more
- Both BHP Billiton and Rio Tinto stressed their commitment to dividend and buyback policies this week.
- Though reiterating the sustained belief in the long-term growth fundamentals of the commodities markets, the focus of the messages in investor presentations is shifting towards limiting and phasing investment, rather than growing as fast as possible.
- Sources: Financial Times; BHP Billiton Macquarie presentation; Rio Tinto Asian investors presentation
Trends & Implications:
- Miners currently focus on returning cash to shareholders because of the combination of short-term cost pressures that make margins shrink and longer term uncertainty about the pace of growth of global demand and the direction of metal prices. Citigroup’s forecast of a falling overall capex (see below in FT’s picture) shows uncertainty about how many of the projects in the current pipeline are really going to make it. Investments in star projects are still done, but the projects that could turn out to be marginal or lossgiving are on hold.
- Mr. Glasenberg’s comments about the share ratio discussion appear to indicate that Glencore’s bid for Xstrata might be sweetened if the deal runs the risk of not being accepted in Xstrata’s shareholder meeting early July.
©2012 | Wilfred Visser | thebusinessofmining.com
Mining Week 10/’12: Xstrata buys coal, Molycorp goes downstream
Top Stories of the Week:
- Xstrata buys more Canadian coking coal
- Xstrata buys the Sukunka coking coal deposit from Talisman Energy for $500mln in cash. The deposit holds 236 million tonnes measured and indicated resource. The non-producing asset is located in the same region as two other assets bought by Xstrata last year.
- Sources: Xstrata press release; Talisman press release; Financial Times
- Glencore/Xstrata merger debates
- While the merger antitrust investigations for the GlenStrata merger are getting started, the executives of both companies are going on a tour to Xstrata’s major shareholders to get buy-in. Several large shareholders (Standard Life, Schroders) have indicated they will vote against the deal at the current 2.8 shares of Glencore per share of Xstrata valuation.
- Sources: Financial Times; Bloomberg
- Molycorp integrates downstream with $1.3bln takeover
- Molycorp, the largest non-Chinese miner of rare earth minerals, made a takeover bid for Canadian processing company Neo Material Technologies, for $1.2bln. The deal will be paid roughly in roughly 2/3 cash and 1/3 shares. The strategic objective of Molycorp is to become a strong player in processing rare earths into semi-finished goods and to gain a strong foothold in exports to China.
- Sources: Molycorp press release; Wall Street Journal; Financial Times
Trends & Implications:
- The continued investment in iron ore and coal assets by both the major diversified miners and many smaller players is based on a belief that the long term demand for construction materials will increase for several decades driven by two main trends: global population growth (more persons), and resource intensity growth (more material per person). Rio Tinto’s latest iron ore presentation summarizes these two points in the pictures below:
- The large mining companies reiterate these points every in every single investor presentation. Because many investors want to see more cash returned to the shareholdes in relatively uncertain times, the companies have to stress continuously that long term fundamentals look good and that large investments are needed.
©2012 | Wilfred Visser | thebusinessofmining.com
Vale drops $1.1bn bid to purchase Metorex
“Brazil’s Vale has dropped its $1.1bn offer for Metorex, a central African copper and cobalt miner, clearing the way for China’s Jinchuan Group to complete a $1.4bn takeover that would establish the state-owned miner in risky frontier markets for metals.
The move came a week after Jinchuan, one of China’s largest mining companies, disrupted its Brazilian rival’s plans by offering R8.90 per share for Metorex. Metorex, however, has not yet recommended Jinchuan’s higher offer to shareholders. Its board will “convene shortly to consider its position with respect to the Vale offer and the Jinchuan offer”, the South Africa-based miner said.
‘Africa is a key focus for our company,’ a Jinchuan executive told the Financial Times. He said it aimed to expand production of copper and cobalt, two industrial metals with rising demand being driven by Chinese consumption.”
Source: Financial Times, July 11 2011
Observations:
- Metorex is a South African copper and cobalt miner with operations in Zambia and Congo. The company’s board has recommended the shareholders to accept Jinchuan’s offer, paving the way for the takeover of the company. Vale withdrew its inferior bid quoting capital allocation rigor as the reason for not doing a higher bid.
- Jinchuan is a government owned non-ferrous metals miner. The company has been rumoured to plan an IPO for many years. End of 2010 the company announced a small acquisition in South African platinum mining and furthermore the company bought a Canadian developer of a mine in Tibet.
Implications:
- The acquisition by Jinchuan is an example of Chinese company’s high willingness to pay for foreign assets. The project is certainly not worth more to Jinchuan than to Vale, which owns assets nearby which could cause synergies. However, Chinese companies are willing to pay a high premium to grow internationally, positioning themselves as state champion in a consolidating industry.
©2011 | Wilfred Visser | thebusinessofmining.com