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Posts Tagged ‘USA’

Mining Week 24/’12: Steam coal world is changing

June 11, 2012 Comments off

Top Stories of the Week:

  • Indonesian and US supply drives coal prices lower
    • A surge of exports of thermal coal (used for power generation) from Indonesia and the increasing exports from the USA caused by domestic replacement of coal demand by gas demand are driving thermal coal prices to the lowest point in 2 years.
    • Continued low sales prices are causing various coal miners to get close to financial distress. As their share prices have decreased too, analysts expect a new wave of acquisitions in the industry.
    • Sources: Financial Times; Seeking Alpha
  • Alpha closes steam coal mines in USA
    • Alpha Natural Resources, the company that recently bought Massey for $8.5bln, is reducing steam coal production and cutting approx. 150 jobs by closing 4 small mines in Kentucky and offices in 4 US cities, aiming to reduce G&A by 50-60$mln/year.
    • The company mentions low coal prices and new regulations for coal-fired power plants as the key reasons that the mines have become uneconomical and are unlikely to return to making a profit.
    • Sources: Alpha Natural Resources news release; Wall Street Journal; Reuters
  • Xstrata reveals GlenStrata organization structure

    • The organization structure revealed in the merger documentation supporting Glencore’s bid for Xstrata shows a merger of the organization with very little initial integration. The heads of marketing of the business units continue to report to Glasenberg, and the heads of the asset groups continue to report to Davis.
    • Glasenberg agreed to not using his significant share of voting power to force any changes of the or structure for the first years after the merger.
    • Sources: Xstrata – Glencore merger documentation

Trends & Implications:

  • The global changes of steam/energy coal business are mainly demand-driven. China and India are building coal-fired power stations at a high pace, increasing their share of global demand. At the same time stronger regulation in the Western world and the promise of cheap gas are suppressing the demand. As a result the coal business is getting more global, with a larger part of demand being imported from overseas.
  • The business unit focus of the GlenStrata organization reveals an inclination to try to realize the arbitrage opportunities that make up a large part of the merger’s synergy potential on a product-by-product basis. Global markets for each of the products is diverse enough to make a generic approach to geographic, product, and timing arbitrage unpractical.

©2012 | Wilfred Visser | thebusinessofmining.com

Peabody, ArcelorMittal Sweeten Offer for Macarthur

July 18, 2011 Comments off

“The world’s largest private-sector coal miner and the largest steelmaker by output on Thursday sweetened their offer for Australian pulverized coal miner Macarthur Coal Ltd. to around A$4.73 billion (US$5.05 billion), while moving a step closer to success by agreeing to start due diligence on the deal. Peabody Energy Corp. and ArcelorMittal said Monday they would start receiving data and site access from Macarthur from the coming Monday.

St. Louis-based Peabody and Luxembourg-based ArcelorMittal made an indicative A$15.50 per share bid for Macarthur, the world’s largest miner of pulverized steelmaking coal, according to the announcement Monday.”

Source: Wall Street Journal, July 14 2011

Observations:

  • Peabody tried to buy Macarthur early 2010, but this offer did not convince the 3 major shareholders (ArcelorMittal, Posco and Citic). In the new offer, announced last week, Peabody teams up with ArcelorMittal in a 60%/40% ownership structure.
  • The sweetening of the offer consists of the withdrawal of the demand that a $0.16/share dividend not be paid out by Macarthur. In turn the buyers get access to the due diligence information required to test the offer assumptions and to prepare integration.

Implications:

  • It appears Macarthur’s board is cooperative in the deal, opening books and mines for inspection in exchange for a small increase in value for current shareholders (approx. 1% of market value).
  • If the deal goes ahead the major shareholders that don’t participate in the takeover will need to decide whether or not to sell their shares. Posco and Citic both are strategic shareholders, but only Posco has interest in retaining access to Macarthur’s products, which will potentially become much more difficult if competing ArcelorMittal increases its ownership stake.

©2011 | Wilfred Visser | thebusinessofmining.com

Peabody in new Macarthur move

July 13, 2011 Comments off

“Peabody Energy of the US has joined forces with steelmaker ArcelorMittal to make a A$4.7bn (US$5bn) bid for Macarthur Coal, the Australian coal miner that was at the centre of a failed three-way bid battle last year. With Chinese-driven demand for coal pushing up prices, Peabody is attempting to expand overseas. ArcelorMittal is seeking to buy mines to secure its steelmaking ingredients at reasonable prices. Macarthur is the world’s top exporter of a coal variety that is one of the hottest commodities in metals and mining. Macarthur received the indicative cash offer of A$15.50 a share on Sunday. It is conditional on the bidding consortium securing at least 50.01 per cent of the target’s shares.

Peabody made a A$15-a-share bid last year but the deal collapsed when it failed to secure backing from Macarthur’s board. At that time, ArcelorMittal and China’s Citic – Macarthur’s two biggest shareholders respectively owning 16 and 24 per cent – indicated they were unlikely to approve the takeover.”

Source: Financial Times, July 11 2011

Observations:

  • Peabody’s previous bid, which collapsed in May 2010, was made conditional on Macarthur’s board approval, which in turn was made conditional on 75% of the shareholder votes supporting the deal. ArcelorMittal, Posco, and Citic, controlling almost 50% of the shares, were afraid to lose contract rights and therefore did not support the deal at the time.
  • The $15.5/share bid holds a 40% premium over the share price prior to the announcement. The share price dipped in June to the lowest point in more than a year driven by low Japanese demand.

Implications:

  • ArcelorMittal ensures long term access to the coal from Macarthur and probably also other Peabody operations by taking a 40% stake in the deal. If the acquisition is successful the company makes an important step in becoming more self-sufficient in its raw material needs by integrating vertically.
  • Peabody would add approximately 25% of its size with the acquisition, and would make a big step to expand operations internationally. As Macarthur is one of the key suppliers of China’s coal demand it might happen that China’s steel industry, led by Citic, will try to outmanoeuvre ArcelorMittal by making a competing bid.

Note: on July 14th this offer was sweetened

©2011 | Wilfred Visser | thebusinessofmining.com

Arch to Buy International Coal for $3.4bln

May 3, 2011 Comments off

“Arch Coal Inc. said it will acquire International Coal Group Inc. for $3.4 billion, becoming the latest coal producer seeking to secure reserves and take advantage of rising prices in the market for metallurgical coal used by steelmakers. St. Louis-based Arch said the all-cash deal will create the fourth-largest coal producer globally and the second-largest U.S. producer of metallurgical coal. The appetite for the relatively scarce, deep-mined form of coal is driven by infrastructure growth in emerging economies like China, India and Brazil.

The deal will enable Arch, which has significant port and barge capacity, to boost exports of high-quality metallurgical coal currently produced by ICG, said Steven F. Leer, Arch’s CEO, in an interview. ‘They bring products we don’t have, and we bring infrastructure that they don’t have,’ Mr. Leer said. ‘It becomes a hand-in-glove fit.’ The combined company would have total shipments of 179 million tons of coal, based on 2010 results, including metallurgical and thermal coal.”

Source: Wall Street Journal, May 3 2011

Observations:

  • Both global steam coal (power generation) demand and metallurgical coal (steel making) demand are expected to rise strongly in the coming decade on the back of strong growth of BRIC-countries. As these countries will not be able to satisfy the domestic demand, imports will increase. This repositions North America as a potential large exporter of coal.
  • The announcement of the acquisition coincides with Massey’s report of a quarterly loss, indicating the cost pressure the industry in the USA is experiencing. Massey will likely be bought by Alpha Natural Resources for $7.1bln, creating a big competitor to the Arch-International combination.

Implications:

  • Arch expects annual cost savings of $70-80mln, justifying a premium of approx. $1bln over ICL’s pre-announcement market cap of $2.2.bln. However, in mid 2010 market cap was as low as $1.0bln. Additional revenue-enhancing synergies as discussed by mr. Leer are required to create value for Arch’s shareholders.
  • Most current merger and acquisition attempts in the US coal market are largely synergy driven. The American market lagged earlier consolidation trends in the global industry, leaving merger opportunities on the table in an industry with many small players. At the end of this wave of consolidation most likely some 2-4 large American coal miners will be created, potentially with strong cross-border activities in Canada.

©2011 | Wilfred Visser | thebusinessofmining.com

Newmont to Buy Gold Miner in $2.32 Billion Deal

February 4, 2011 Comments off

“Newmont Mining Corp. said Thursday it is using a war chest swelled by the rise in gold prices to expand in Nevada through the acquisition of Fronteer Gold Inc. Newmont Mining, the world’s second-largest gold producer after Barrick Gold Corp., will pay 2.3 billion Canadian dollars (US$2.32 billion) in cash for the shares of Fronteer Gold, a Vancouver explorer with three projects in Nevada, including the Long Canyon project that holds a key position on a newly discovered gold deposit.

Newmont Mining will pay $14 a share for Fronteer, a 37% premium to a share’s value before the deal was announced. Fronteer’s board supports the deal, and its shareholders will vote on it in April. If approved, Newmont Mining expects the deal to close that month. If Fronteer shareholders reject the deal for a higher competing offer, the company will pay an C$85 million termination fee.”

Source: Wall Street Journal, February 3 2011

Observations:

  • The termination fee arranged by the Newmont negotiators protects the company from the risk of losses resulting from financial arrangements and deal work in case the deal is not closed. BHP Billiton is reported to have lost over half a billion in its attempt to acquire PotashCorp because of the financial arrangements it had to make to enable the offer.
  • The cash offer does include a special construction in which the Peruvian, Turkish and some Nevada exploration activities are combined in a new company: Pilot Gold. Pilot Gold will be 80% owned by current Fronteer shareholders and will be run by current Fronteer management, basically ensuring a continuation of the exploration company.

Implications:

  • A recent poll on this blog revealed expectations of high activity in M&A in coal mining (38% of respondents) and gold mining (25% or respondents). High coal and gold prices both give the miners in these sectors large war chests and increase the pay-off of synergies and expansion projects.
  • Barrick is not expected to come with a counterbid, and GoldCorp or other gold miners are unlikely to be able to offer a higher cash price.

©2011 | Wilfred Visser | thebusinessofmining.com

Alpha agrees to buy Massey for $8.5bn

January 31, 2011 Comments off

“Alpha Natural Resources, the third-biggest US coal producer, agreed to buy its rival Massey Energy for about $8.5bn in cash and stock, as the consolidation of the global coal sector continues apace.

Under the terms of the deal, Massey shareholders receive 1.025 Alpha shares plus $10 cash for each share held, valuing Massey at $69.33 a share, or 21 per cent more than its last trading price on Friday. The $8.5bn valuation includes net debt.

The combined operations will own more than 110 mines and coal reserves of about 5 billion tons, including one of the world’s largest metallurgical coal reserves. Alpha itself has 60 active mines throughout Virginia, West Virginia, Kentucky, Pennsylvania and Wyoming.”

Source: Financial Times, January 29 2011

Observations:

  • The announcement of the deal does not mention how the companies will handle potential liabilities springing from the safety investigations following April’s disaster in which 29 miners were killed. The deal is subject to shareholder and regulatory approval.
  • The merged entity will be the coal champion of North America, but will still be mainly focused on supplying the domestic industry.

Implications:

  • Will the agreement between Massey and Alpha lead to other bidders? Most likely not. ArcelorMittal was interested earlier, but the synergies to be achieved by Alpha might be larger and the corporate cultures of the companies are clearly more aligned. An alternative bidder will have to come with a very large premium to prevent Massey’s board from convincing the shareholders of the merits of merging with Alpha.
  • The $8.5bln deal (including net debt of approx. $1.4bln, making net deal value some $7.1bln) is one of the largest across industries in the last months. The deal shows the resurgance of mining M&A to be expected in 2011, with coal and gold being the primary commodities that will trigger M&A.

©2011 | Wilfred Visser | thebusinessofmining.com

World Steel Association: World crude steel output increases by 15% in 2010

January 27, 2011 Comments off

“World crude steel production reached 1,414 million metric tons (mmt) for the year of 2010. This is an increase of 15% compared to 2009 and is a new record for global crude steel production. All the major steel-producing countries and regions showed double-digit growth in 2010. The EU and North America had higher growth rates due to the lower base effect from 2009 while Asia and the CIS recorded relatively lower growth.

Annual production for Asia was 881.2 mmt of crude steel in 2010, an increase of 11.8% compared to 2009. Its share of world steel production increased to 65.5% in 2010 from 63.5% in 2009. China’s crude steel production in 2010 reached 626.7 mmt, an increase of 9.3% on 2009. China’s share of world crude steel production declined from 46.7% in 2009 to 44.3% in 2010.”

Source: World Steel Association, January 21 2011

Observations:

  • Annual steel production has increased to a new record, fully recovering from the reduced production in 2009. This reduction was fully caused by production outside China. Chinese production has increased every single year for the past decade.
  • The new iron ore pricing system leads to complaints about higher raw materials costs with many steelmakers (current spot price at $175/tonne). The recent spike in coal costs (currently up to $350/tonne) further reduces the margins of the steel makers. American producers are posting significant losses.

Implications:

  • Focus of the industry is on the new tax policies to be introduced in China to cool down the economy. Increased consumer prices of steel might have a significant impact on the growth rate of the Chinese industry, starting in the second half of 2011.
  • Across the world the increased prices of raw materials will be passed on to customers, as the mining and transportation costs are not likely to return to the levels of early 2009 with global supply conditions.

©2011 | Wilfred Visser | thebusinessofmining.com

Cliffs to buy Canadian iron-ore miner

January 18, 2011 1 comment

“In a bid to capture more international markets, U.S.-based mining company Cliffs Natural Resources Inc. said it agreed to buy Canada’s Consolidated Thompson Iron Mines Ltd. for about 4.9 billion Canadian dollars (US$4.95 billion).

The deal, an all-cash offer of C$17.25 a share already approved by Consolidated Thompson’s board, is expected to be completed in the second quarter. If approved, Cliffs, a Cleveland-based coal and iron-ore producer, would add about eight million metric tons of capacity to its existing 40 million metric tons of capacity located in Canada, the U.S., Australia and Brazil.”

Source: Wall Street Journal, January 12 2011

Observations:

  • The combined company will have a market capitalization of approx $16bln; Cliffs being 3 times the size of Consolidated Thompson.
  • To place the combined capacity of 48mln tons in perspective: BHP Billiton, the 3rd largest iron ore producer, produced 114mln tonnes of iron ore in 2009.

Implications:

  • Submission for approval by the Canadian authorities will have to prove the net benefit for Canada under the Investment Canada Act. Although the operational benefits for the mines that are located closely together are easy to point out, Cliffs will have to convince the government that jobs will be secure and tax income for the country will not decrease. The expansion plans for Bloom Lake mine will be helpful in this discussion.
  • Cliffs expansion helps to create a significant international player for the USA in the market. As the USA still is a large steel market, a large part of Northern American iron ore is consumed in the States. Cliffs gains access to the customer portfolio of Thompson, including Wuhan Iron & Steel, enabling it to sell iron ore internationally at higher prices.

©2011 | Wilfred Visser | thebusinessofmining.com

Retailers Fight to Escape ‘Conflict Minerals’ Law

December 2, 2010 Comments off

“Top U.S. retailers including Wal-Mart Stores Inc. and Target Corp. are battling to limit a new federal law that could force them to report whether their store-brand goods contain minerals from war-torn Central Africa.

The requirement, part of the Dodd-Frank financial law passed in July, aims to pressure companies to spurn so-called conflict minerals—tin, tantalum, tungsten or gold from parts of the Democratic Republic of Congo or neighboring countries. Income from those minerals is blamed for fueling violence that has claimed millions of lives in eastern Congo, which a senior United Nations official recently branded the world’s rape capital.

Under the new law, public companies using any of the four minerals from Central Africa must report what steps they have taken to verify the minerals weren’t taxed or controlled by rebel groups. Products that don’t contain minerals that benefited such groups can bear the label “DRC conflict free.” Companies that fail to verify their sources can still sell their products, but could face embarrassment.”

Source: Wall Street Journal, December 2 2010

Observations:

  • Retailers don’t want to report what they did to control sustainable and responsible extraction and trading of the minerals used in their white label products. The law is designed to force sellers to disclose the sources they use for their products in order to make the use of ‘conflict minerals’ transparent to the public.
  • Similar government, industry and NGO-driven initiatives are deployed around the world, especially in the area of precious metals and gemstones.

Implications:

  • The new law forces ‘downstream’ retailers of final products to become more involved in the ‘upstream’ mining of the products. As miners have to comply with supply chain standards of the customers, the value chain becomes more integrated and more demand driven.
  • It is likely the mining industry will have to implement a REACH-like system to track and report the supply and origin of its products. Although it might take a decade or more to establish an industry standard, various miners are starting to implement internal systems.
  • The retailers are assuming a similar strategy as Nike did in the sweatshop supply problems it faced, taking the viewpoint that they are not responsible for the social responsibility of their suppliers. However, as complying to the new law would not cost them much and the potential consumer reaction is large, they would better give up their resistance and lead the change.

©2010 | Wilfred Visser | thebusinessofmining.com

Consolidation in coal mining as steel industry heats up

November 22, 2010 1 comment

“Vallar, the cash shell founded by financier Nat Rothschild, is paying $3bn to create a mining company that will see Indonesia’s powerful Bakrie family debut with a London listing for their interests.

A new company bundling together the assets of two Indonesian groups and the shares of Vallar will be listed in London as Bumi Plc. Shares in Vallar, which raised £700m ($1.1bn) in a public flotation in July, will be suspended.”

Source: Financial Times, November 16 2010

“Walter Energy Inc. is in talks to buy Canadian rival Western Coal Corp. for $3.24 billion to form a steelmaking-coal giant, the latest in a string of deals in the commodity sector as mining companies race to corner reserves ahead of rivals.

If the deal goes through, the combined company would have more than 20 million tons of annual coal-production capacity by the end of 2013 and would be the world’s largest publicly traded ‘pure-play’ metallurgical coal producer…

Massey Energy Co. is exploring a takeover offer from Alpha Natural Resources Inc., the biggest U.S. metallurgical coal producer. Global steelmaker ArcelorMittal is also interested in Massey.”

Source: Wall Street Journal, November 19 2010

Observations:

  • Vallar, a new mining company listed on the London Stock Exchange in June, will combine the coal mining assets of Bumi and Berau, the largest and fifth-largest coal miners of Indonesia, to create the largest exporter of coking coal to China.
  • North American coking (or metallurgical) coal producers are exploring mergers or partnerships to create a player that can export both to the east and the west.

Implications:

  • So far coal is one of the resource businesses that is least consolidated. Very few players are able of supplying coal around the world. The moves in North America and Indonesia indicate a trend to create larger suppliers in order to have a better negotiation position for contracts with steel makers.
  • Vallar is planning to use the Indonesian operations as a platform for further expansion in Indonesia and abroad. When listed the company mentioned it would be able to focus principally on regions and commodities where it could leverage the extensive network and strong prior operating and investment experience. As James Campbell, one of the founders, is a former executive of Anglo Coal, the move into coal mining does not come as a surprise.

©2010 | Wilfred Visser | thebusinessofmining.com