Archive
Mining Week 52/’11: Chinese investment welcome in Australia
Top Stories of the Week:
- Australia solicits Chinese infrastructure investment
- The government of Western Australia is trying to speed up the development of port and rail facilities of the Mid West region’s Oakajee port by stripping the Mitsubishi/Murchison combination of exclusive development rights and inviting Chinese parties to step in. 8 of the 14 projects in development in the region have Chinese investors.
- Sources: Wall Street Journal; Government statement; Murchison Metals statement
- Yanzhou teams up with Gloucester coal
- Yanzhou’s Australian coal company Yancoal will merge with Gloucester coal, 64.5% owned by Singapore-based Noble group. As a result Yancoal obtains a listing on the Australian stock exchange, a condition put on the 2009 acquisition of Felix Resources
- Sources: Wall Street Journal; Financial Times; Wall Street Journal blog on synergies
- Anglo and Codelco fight for Minas Sur stake
- Anglo American launched a range of claims in Chilean court trying to prevent Codelco from being awarded the right to buy a full 49% of the Minas Sur assets. The scope of the option for Codelco to buy 49% has been unclear since Anglo sold a 24.5% stake to Mitsubishi. In response to Anglo’s claims Codelco restated its intention to acquire 49% of the full project.
- Sources: Financial Times 1; Financial Times 2; Anglo American press release
Trends & Implications:
- As expected Chinese investments have proven to be a key driver of M&A activity in the mining industry in 2011. It is noteworthy that many Chinese firms are using a foreign based subsidiary or team up with a Western firm to do foreign investments. This structure holds 2 main benefits for the Chinese investors: they obtain an experienced western staff with knowledge of the way of doing business in the target countries; and they are viewed much more favorably by regulators when trying to execute deals.
- The fight of Anglo American and Codelco over Minas Sur appears to become a long term court fight. The longer this court fight stretches, the more inclined Anglo American will be to find a compromising deal, as the uncertainty about the ownership structure will delay all investment decisions for the company in the mining region.
©2011 | Wilfred Visser | thebusinessofmining.com
Nippon Steel, Sumitomo Metal to Merge
“Nippon Steel Corp. and Sumitomo Metal Industries Ltd. agreed to merge by next year, creating what would be the world’s No. 2 crude-steel producer and a tougher competitor to rivals in China and India.
The deal marks the first major consolidation in the Japanese steel industry in a decade and comes as the nation’s leading steelmakers struggle to regain their footing after the global recession. Caught between rising costs for raw materials and weak pricing power with auto makers and other key customers, Japan’s steelmakers have had difficultly boosting their profit margins.”
Source: Wall Street Journal, February 3 2011
Observations:
- Nippon Steel came in the international news in July when it announced a drop in profitability due to higher input costs. Sumitomo also reached the headlines in July by buying a stake in a Brazilian iron ore mine of Usiminas.
- The firm will first create a new holding company, and plans to slowly integrate operations, starting combined operation only at the end of 2012.
Implications:
- New synergies are expected to be limited because of the far-stretching cooperation the firms are already involved in. However, the improved purchasing position will help the Japanese to compete with the large Chinese players in securing long term supply contracts with Brazilian and Australian miners. Furthermore, the management of the firms is looking to expand the product portfolio.
- It will be hard for the Japanese to create an even bigger company to compete with Chinese and Indian rivals. Regulatory officials will not oppose this deal, but merging with the country’s #2, JFE Steel, would create a domestic monopoly. The new company will mainly have to compete by exporting value added products, outperforming the Chinese in product quality.
©2011 | Wilfred Visser | thebusinessofmining.com
Caterpillar to Acquire Bucyrus
“Caterpillar Inc. (NYSE: CAT) and Bucyrus International, Inc. (Nasdaq: BUCY) announced today they have entered into an agreement under which Caterpillar will acquire Bucyrus International in a transaction valued at approximately $8.6 billion (including net debt). The acquisition is based on Caterpillar’s key strategic imperative to expand its leadership in the mining equipment industry, and positions Caterpillar to capitalize on the robust long-term outlook for commodities driven by the trend of rapid growth in emerging markets which are improving infrastructure, rapidly developing urban areas and industrializing their economies.”
Source: Caterpillar Press Release, November 16 2010
Observations:
- Bucyrus has a product portfolio including drills; draglines; shovels; excavators; mining trucks; highwall, longwall and room & pillar miners; and belt systems. This portfolio complements the position of Caterpillar, which is mainly strong in loaders and trucks in the mining industry. Sales are roughly equally divided over surface and underground mining equipment.
- The offer worth $8.6bln is all cash, forcing Caterpillar to increase debt by approx. $5bln and equity by approx. $2bln. However, as Caterpillar is more highly leveraged than Bucyrus, the deal will actually help CAT to reduce leverage.
Implications:
- The premium of 32% will have to be justified by synergies that are mainly to be found in consolidation of the supply chain, dealer and service network and in the potential for increased revenues as the Caterpillar gains a stronger position to be the sole-source supplier of mines
- The closing of the deal is subject to regulatory approvals, which might force Caterpillar to divest some assets in order to prevent a dominant position in several markets. Especially in the area of mining trucks the new company becomes a dominant player, as Bucyrus bought the mining division of Terex early this year.
©2010 | Wilfred Visser | BlogCatalog | thebusinessofmining.com
Vertical integration in mining: the trader’s value chain
Vertical integration has been a significant driver of acquisitions in the mining industry in the past decades. As steelmakers and other mineral processers were trying to secure supply of resources, they increasingly decided to buy mines and mining companies. The next decade will show another interesting development. The vertical integration will increasingly include the next step in the value chain: trading.
Vertical integration in mining
The looming merger of Glencore and Xstrata will create the first of a new type of companies. The integrated mining, processing and trading companies will span the entire value chain of the resource world. This development is not unique. In many other industries the drive to become more customer-centric has resulted in similar moves.
The fact that a large part of the global resource production never enters the global trade and the nature of commodity markets, in which price is the key differentiator, has made the development in mining and metals slower than elsewhere. Furthermore, there is a large difference between the corporate cultures of the trading houses and the large mining companies.
Why integration?
Now why would the resource producers want to merge with traders? What synergies will be achieved in such a combination? The key of the answer is improvement of supplier power. A significant cost reduction and productivity improvement will be achieved by eliminating the trading department of the resource company after transferring the crucial activities to the trading house. However, most money will be made because of improved trading terms.
An exiting additional benefit in the long term could be that mines are going to produce on demand and just in time. If customer A in Japan sends its specified needs to the traders, the next step should be to translate the order into a production schedule for the mine and plant.
Consequences for mining
What will the integration along the value chain imply for miners? First of all they will slowly be forced to think more about the customer and less about the technology. Secondly, the production schedules will need to become more flexible in order to be able to deliver what is demanded. Finally, as the new company will be able to better respond to changes in commodity prices, more mines will start aligning their output volume with demand. In the extreme case this will mean that more mines will temporarily be shut down or sleeping mines temporarily opened again.
Concluding: Mining will become more flexible. Vertical integration including trading houses will not cause a revolution in the industry, but it will change priorities and slowly make the mining industry a more customer-centric environment.
Glencore IPO seen as route to Xstrata
“The question hanging over the initial public offering of Glencore, the world’s biggest commodities trader, has moved from “if” to “how”.
Banks, seeing an IPO of at least $35bn (pound(s)23bn), have been pitching furiously to Glencore, which is understood to be considering many options. But there are difficulties in valuing this privately-owned powerhouse, which is a miner as well as a trader of everything from coal to soyabeans.
Observers suggest preparation for a flotation is the necessary precursor to a merger with Xstrata, in which Glencore has a 34 per cent stake, which could create a natural resources giant valued at more than $50bn. Speculation over a merger is something neither side has sought to damp.”
Source: Financial Times, May 3 2010
Observations:
- Glencore is reaching the limits of growth opportunities as a private company, as the possibilities to attract additional capital are limited without going public.
- Glencore’s executives own a major stake of the company. Combined with the 30%+ stake of Xstrata Glencore holds, the executives will come close to owning a majority of the shares in the new company.
- As it is more or less impossible to carry out an accurate valuation of Glencore, experts expect the company to go public and get a market valuation before merging with Xstrata.
Implications:
- Xstrata will be willing to cooperate, as the company might otherwise sooner or later become the victim of a hostile takeover by either BHP Billiton, Rio Tinto, Vale or Anglo American.
- The companies will need to invent a reward system for Glencore’s executives that will not leverage the balance sheet too much when the executives retire and take their share of the equity.
- The merger of the Mining & Metals firm and the Trading firm will introduce a new type of company to the competitive landscape. The combination will be a major player in a very large part of the commodities value chain
- Key synergies will likely be found in consolidation of the trading departments (mainly reducing costs in Xstrata’s current operations) and in increased supplier power leading to renegotiation of trade terms.
Top Miner’s M&A History
Gold Miner’s M&A History
