Archive
Mining Week 24/’12: Steam coal world is changing
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
“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
World Steel Association: World crude steel output increases by 15% in 2010
“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
“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
“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
Top Miner’s M&A History
Gold Miner’s M&A History
