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Posts Tagged ‘South Africa’

Mining Week 6/’13: Government actions in South Africa and Argentina

February 10, 2013 Comments off

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

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Mining Weekly 52/’12: Copper Wars continued, South African taxes

December 24, 2012 Comments off

Top Stories:

  • Copper Wars: First Quantum raises takeover bid for Inmet
    • Almost 2 years after the consolidation in the copper mining industry was accelerated by the proposed merger of Lundin and Inmet, First Quantum is trying to take over Inmet to form a major copper producer. Inmet’s board rejected two earlier, lower bids, and is now facing a $5.1bn takover offer.
    • The proposed Lundin-Inmet (Symterra) merger did not materialize because Equinox made a takeover bid for Lundin, after which Equinox was acquired by Barrick, which ‘won’ a bidding war with Minmetals.
    • In attempts to get the Cobre Panama project funded Inmet earlier this year sold a stream with most of the planned precious metals production to royalty company Franco Nevada for an investment of approx. $1bn.
    • Sources: Wall Street Journal; Financial Times; Newsday

    Copper Wars - Inmet - First Quantum

  • ANC will not nationalize South African mines, but wants to increase taxes
    • The ruling ANC party has turned down a plan to nationalize the mining sector in the country. At the same time the party leaders do call for increased taxes to keep a larger part of the benefits from natural resource extraction in the country. No details on the tax increases have been given yet.
    • Sources: The Globe and Mail; Wall Street Journal; Financial Times

Trends & Implications:

  • The copper industry is in a phase of consolidation because many large development projects are in the hands of relatively small miners who don’t have the funds to develop the large projects on their own. With project pipelines being scrutinized in the light of slowing demand growth, large miners are searching for and buying those projects that are actually going to make it, and small miners with and without good development projects try to team up to combine operating assets with strong development projects.
  • South Africa is already one of the countries with the highest effective tax rates to mining companies in the world, combining a 28% income tax rate with a 10% secondary tax, and adding mining royalties depending on the mineral mined. Further tax increases will make it very unlikely that foreign companies try to enter into the South African mining landscape, but will also make it more attractive for the large South African players to try to expand abroad.

2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 42/’12: South Africa strikes; Glenstrate voting scheme

October 8, 2012 Comments off

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 38/’12: Fortescue in debt trouble; South African shutdowns

September 16, 2012 Comments off

Top Stories of the Week:

  • Fortescue trading halted in prep for announcement
    • Trading in Fortescue’s shares has been halted in preparation of an announcement to be made by Tuesday Sep-18. The company earlier in the week stressed it is in compliance with all its debt covenants, but it is looking to restructure debt as low prices and aggressive expansion investment could result in short-term liquidity problems for the company.
    • Fortescue is a rapidly growing iron ore producer active in Western Australia’s Pilbara region. The company is ramping up to produce 155mn tonnes per year (from a current 60Mtpa), but it has lost 50% of its market value over the past 6 months as investors doubt it will manage to finance the investment plans without sustained high iron ore prices.
    • Sources: Fortescue announcements; Financial Times; The Australian
  • South African trouble spreads beyond Lonmin
    • Anglo Platinum shut down its Rustenburg operations this week as employees showing up for work were intimidated by striking colleagues. In the meantime Lonmin’s Marikana operations are still shut down and Xstrata and GoldFields reduced production in precautionary measures.
    • Despite talks between Lonmin and unions a deal between the striking miners and the company appears to be a long way off. The gap between Lonmin’s wage increase offer and the demands by the unions is over 100%, and the social unrest and promises made by many leaders make it hard for the unions to accept a deal that is much lower than the initial demands.
    • Sources: Financial Times 1; Wall Street Journal; Financial Times 2
  • Glencore’s new offer received positively
    • Glencore released the details of its new offer for takeover of Xstrata. The increased share ration and deal terms appear to win over a sufficient part of Xstrata’s shareholders to make the deal happen. Qatar’s sovereign wealth fund, Xstrata’s 2nd largest shareholders behind Glencore, did not yet respond to the offer.
    • According to the new terms Xstrata’s CEO Mick Davis would have to step down and leave the reign to Glencore’s Ivan Glasenberg within 6 months and the retention package for senior Xstrata managers would stay intact unless Xstrata’s board of directors wants to change it.
    • Sources: Glencore documentation; text; Financial Times

Trends & Implications:

  • Fortescue might suddenly become the focal point of the next big takeover attempt in the mining industry. Share price has decreased dramatically compared to iron ore majors, and both BHP Billiton and Rio Tinto could realize significant synergies with Fortescue’s operations and projects in Western Australia’s Pilbara region.
  • The current low iron ore price has created a situation in which Fortescue’s share price is depressed because operating cash flow does not support the planned combination of investment and debt repayment. Fortescue’s expansion is for a large part finance by debt, loading a company which is worth just over $9bn with over $8bn of debt. BHP Billiton, Rio Tinto, and Vale should all be interested in an acquisition and would be able to get a better deal at debt restructuring because they would pose a lower risk of default to lenders.
  • Caused in part by less potential for economies of scale in transportation than the key competitors, Fortescue operates at clearly higher costs (i.e. lower margins) than Rio and BHP. Quickly realizing cost synergies and aligning the project portfolio with the larger portfolio for the acquiring company would/will be the focus of successful integration.

2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 34/’12: Lonmin labor dispute turns deadly

August 18, 2012 Comments off

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 51/’11: Grasberg back in business

December 18, 2011 Comments off

Top Stories of the Week:

  • Freeport McMoran strikes deal on Grasberg
    • Freeport reached a two year extension of the collective labor agreement at its Indonesian Grasberg mine after a 3-month strike. The new agreement holds a 40% wage increase over 2 years, improved benefits, and the promise to base wage future negotiations on cost of living and competitor benchmarks.
    • Only days after the announcement of the agreement a helicopter transporting Freeport’s workers was shot at close to the mine, wounding one person.
    • Sources: Freeport McMoran press release; Wall Street Journal; Financial Times
  • Further coal consolidation in Australia
    • Less than a year after being put up for sale and then declining all offers made Whitehaven teamed up with Aston Resources to create the largest listed coal mining company in Australia with $5.1bln market value. The deal is structured as a shares only acquisition of Aston by Whitehaven.
    • Sources: Financial Times; Whitehaven merger documentation
  • Anglo reassured in South African court
    • The South African court ruled that the department of mines had no right to grant the mining rights of Sishen iron ore mine in the country to a junior mining company with strong ties to some influential politicians, but that instead the Kumba Iron Ore holds the rights to the mine. Kumba is majority owned by Anglo American.
    • Sources: Anglo American press release; Financial Times; Wall Street Journal

    Trends & Implications:

    • The coal mining industry in Australia is still relatively fragmented, with both the diversified supermajors and many domestic listed and unlisted companies active in the industry. Because the mining districts are much less concentrated than the iron ore or gold districts of the country it is harder to achieve economies of scale that would justify many mergers. The deals taken place are mainly based on transportation and sales negotiation synergies.
    • The Wall Street Journal published a good, readable, article this week describing the developments in the mining industry, signaling the combination of two key drivers this year: declining prices, and increasing costs. The resulting low margins will move the focus of many mining companies in the coming years to cost control. However, the winners of this cycle will be the companies that manage to invest during this period with lower profits to build capacity that will make them benefit from the structural increase in prices that will be caused by the structural price increases in the industry. Clearly not all cost increases are structural: equipment and contractor scarcity is mainly a temporary result of an overheated industry; but cost increases resulting from the move to harder forms of mining will stick.

    ©2011 | Wilfred Visser | thebusinessofmining.com

Anglo chief plays down acquisition talk

September 14, 2011 Comments off

“Cynthia Carroll, chief executive of Anglo American, has downplayed speculation that the multinational miner is on the hunt for acquisitions, saying that bid prices in the mining sector have been ‘too high’ for the company to enter the fray.

‘We are always looking at possible combinations across the sector and always evaluating whether it’s a better business case to build our own projects or look at acquisition opportunities,’ said Cynthia Carroll. But she added that ‘prices are still too high’, basing her comments on recent bids and takeovers.

In recent months, Anglo has been linked to a bid for Riversdale Mining, an Mozambique-focused coal miner that was ultimately bought by Rio Tinto for A$4bn. More recently, it considered a possible bid for Macarthur Coal, an Australian coal miner. Macarthur has since accepted a joint A$4.9bn ($5.2bn) bid from a consortium led by Peabody of the US. The bid values the Macarthur at 18 times estimated 2012 earnings.”

Source: Financial Times, September 13 2011

Observations:

  • Anglo American has not made any large acquisitions since 2008, when it bought several iron ore assets in Brazil. Of the 5 large diversified miners the company has been least active in large scale M&A over the past 10 years, as depicted below (click on image for larger version).

Implications:

  • If the acquisitions would be paid in shares, the current low share prices would hinder acquisitions (large dilution of ownership). However, with the current large operating profits acquisitions are mainly paid in cash.
  • Valuation of companies is done in various ways, based on standalone company value and additional financial and operational synergies of a change of control, all leading to different results: a ‘true value’ of a company can never be determined, as the value differs per acquirer and valuation assumptions are debatable. However, the fact that various companies are acquiring targets in Southern Africa which would have a better operational match with Anglo American (= higher synergies) implies that Anglo is more conservative in its valuation, being cautious to overpay.

©2011 | Wilfred Visser | thebusinessofmining.com

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