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Posts Tagged ‘valuation’

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

Coal’s Glow Attracts Major Miners

September 12, 2011 1 comment

“The sector’s confidence in emerging market demand for coal, especially the sort used in steel making, is keeping deal activity brisk. Four of the 10 largest mining-sector mergers and acquisitions in the first half of this year were for metallurgical coal assets, according to PwC. Total deal value so far this year, at nearly $19 billion, is already close to last year’s $22 billion total. Peabody Energy and ArcelorMittal’s $5 billion agreed bid for Macarthur Coal late last month is unlikely to be the last transaction. Anglo American, which was in the running for Macarthur, remains on the prowl for acquisitions, as do other mining majors.

But strong demand and a scarcity of top-notch coal assets can lead to punchy valuations. Acquirers this year have paid 13.2 times trailing operating profit for coal companies, compared with an 11.2 times average over the previous decade, according to IHS Herold. Peabody and ArcelorMittal are paying 20.8 times trailing operating profit for Macarthur.”

Source: Wall Street Journal, September 9 2011

Observations:

  • Top coal mining deals of the last year include Peabody-Arcelor’s (PEAMcoal) $5.2bln bid for Macarthur, Itochu’s $1.5bln Drummond deal, Alpha Natural Resources $8.5bln acquisition of Massey, and Arch Coal’s $3.4bln acquisition of International Coal.
  • In a poll on this site in January 38% of respondents indicated coal would be the commodity triggering most M&A in 2011.

Implications:

  • The key drivers for high valuations of coal producers in the last year are consolidation of the North American industry and the ‘need’ for steelmakers to integrate vertically and secure the access to a stable supply. A similar trend could drive up valuations of iron ore mines if growth of demand keeps up and ramp up of capacity of the major miners goes as slow as expected.
  • Most of the recent acquisitions in the coal sector have been done by Indian steelmakers or US coal miners, with targets often in Indonesia, Australia and Southern Africa (all relatively close to Asian consumers). Surprisingly Chinese companies are not yet playing an important role. Strategic acquisitions by Chinese steelmakers and/or coal mining giants, supported by government institutions, could further drive up valuation ratios of metallurgical coal assets in the area.

©2011 | Wilfred Visser | thebusinessofmining.com

Glencore should scale back IPO hopes

May 5, 2011 Comments off

“For Glencore International, it is time for Plan C. Xstrata put the kibosh on Plan A when it refused to consider a merger with the commodities-trading giant that would have enabled Glencore partners to realize the full value of their 34.5% stake in the miner.

Investors now have ruined Plan B by refusing to accept Glencore’s ambitious $60 billion-plus valuation target, which might have allowed a quick post-IPO merger. Glencore has been forced to lower its target and must prepare for a long spell in the public markets.

Glencore’s advisers insist Mr. Glasenberg realizes the need for a realistic price that will allow it to trade healthily in the aftermarket. That would help rebuild investor confidence after the poor start to the IPO. So Glencore’s final IPO price will need to offer investors a generous discount. Mr. Glasenberg should brace himself for a price at the bottom of the range.”

Source: Wall Street Journal, May 5 2011

Observations:

  • The commentators from Wall Street Journal argue that the uncertainty of a potential merger with Xstrata and the politically sensitive nature of Glencore’s mining assets forces the company to offer the shares at a strong discount in the Initial Public Offering (IPO), raising less cash than previously hoped.
  • Glencore is going public to facilitate further growth ambitions. In its current private structure it can not raise sufficient money for further growth. Merging with Xstrata would be an other way to solve this problem, but this requires putting a value on Glencore to decide on the new ownership structure, something Xstrata’s management and shareholders clearly are not willing to do.

Implications:

  • Shares are typically sold at a discount in an IPO, encouraging investors to take a share of the company and realize a paper profit in the first days of trading. However, if shares indeed go up strongly in the first days of trading and market value of Glencore reflects intrinsic value correctly, the WSJ-commentators’ prediction of a difficult negotiation with Xstrata because of skewed valuation does not hold.
  • With current high commodity prices a large part of Glencore’s profit comes from its industrial assets, rather than from trading activities. Citi expects the industrial share to be as high as 60% in the next years. A relatively higher importance of production vs. trading in the company could make integration of Glencore with Xstrata and/or other mining companies smoother.

©2011 | Wilfred Visser | thebusinessofmining.com

Glencore to reshape board as IPO looms

January 26, 2011 Comments off

“Glencore plans a board shake-up as the world’s largest trading house heads towards a $50bn-$60bn public listing in London in the second quarter of the year. The Swiss-based trading house is talking to many current and former executives in the natural resources world about potential roles as senior non-executive directors for its new board, according to people familiar with the discussions.

Ivan Glasenberg, the South African chief executive of Glencore, recently held talks with Tony Hayward, the former BP chief, about a role as non-executive director in the trading house. Glencore has also held talks with Chip Goodyear, the former chief executive of BHP Billiton, the world’s largest miner by market capitalisation.

Bankers expect Glencore will disclose its plans for a $50bn-$60bn IPO in mid-March, when the trading house reports its annual results. But the trader is keeping its options open and it could still seek a merger with Xstrata, the miner in which it owns a dominant 34 per cent stake.”

Source: Financial Times, January 23 2011

Observations:

  • Glencore is one of the world’s largest private companies. However, it is experiencing growth problems as it can’t raise money to grow by issuing more equity. Furthermore the company needs to prepare for enormous payouts to top executives leaving the firm, which could cause liquidity problems. Going public would solve these problems.
  • The trading house, owning large stakes of various mining companies, showed strong profit growth for Q3 of last year, mainly driven by booming agricultural commodity prices.

Implications:

  • Most likely Glencore will have to perform an IPO before it can merge with Xstrata, as this is the easiest way to figure out the value of the company. Estimates of valuation of the company are based on a bond it issued at the end of 2009 and on industry multiples (PER of 14-18).
  • Various insiders question the probability of success of a merger with Xstrata, as the corporate cultures of the extremely results-driven trading house and the more relaxed mining house could clash. A merger between the two companies would produce the first fully vertically integrated natural resources major, which could open the door to new ways of negotiating with clients and new types of contracts.

©2011 | Wilfred Visser | thebusinessofmining.com