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Mining Week 08/’12: GlenStrata’s antitrust & an Indian giant

February 25, 2012 Comments off

Top Stories of the Week:

  • Glencore and Xstrata to seek merger approval in Brussels
    • Despite earlier statements that Xstrata and Glencore would not need to seek approval from the European Commission the parties have now decided to submit their case for approval in Brussels.
    • The companies argue that there is no significant increase in market domination because of the strong ties the companies already had prior to the merger.
    • The European Commission will now have to decide on the potential restrictions to the new company, such as the obligation to sell certain elements of the business. A market density index calculation is used to see whether or not the new company would have a too dominant position. The big uncertainty in this calculation is how the Commission will scope the market or markets the companies are active in.
    • Sources: Wall Street Journal; Financial Times; EU Merger Control Rules
  • Vedanta merges Indian assets to create Indian mining giant: Sesa Sterlite
    • Vedanta has decided to merge all its Indian assets, including Sesa, Sterlite, and Cairns India, into one big Indian company. This new Entity will be named Sesa Sterlite and will have a market capitalization of around $22bln. Vedanta will hold just under 60% of the shares.
    • Sources: Times of India; Economic Times; Vedanta presentation
  • Tavan Tolgoi plans to list in June
    • The Mongolian government plans to list a significant part of Tavan Tolgoi, a large coking coal project in the south of the country, in both London and Hong Kong this summer. Regulatory issues threaten to delay the HKEx listing.
    • The government plans to eventually hold 51% of the shares, give 20% to the population, sell some 10% to local business at a discount, and make the rest available to international investors. A significant part of the 20% given to the population might find its way to international investors.
    • Sources: Wall Street Journal; FOX Business

Trends & Implications:

  • The creation of Sesa Sterlite builds both a second diversified miner with a significant oil & gas business (next to BHP Billiton) and a second diversified miner with a significant interest in zinc (next to Glencore/Xstrata).
  • If Vedanta manages to both make the merger integration of the 7 or more individual companies a success and to manage its investments in other developing countries successfully, it creates the primary candidate to become the stable Indian mining giant. Growth of the Indian industry is phenomenal but faces many challenges. The mixture of a very strong Indian foothold with high growth assets in many other developing countries could prove to be a good basis for risk diversification.

©2012 | Wilfred Visser | thebusinessofmining.com

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Mining Week 46/’11: Hard times for emerging market multinationals

November 13, 2011 Comments off

Top Stories of the Week:

  • Vedanta reports disappointing results
    • Earnings of the industrial metals miner with many operations in India dropped despite revenue increase of 43% for the half year. Reduced earnings were caused by losses in the aluminium group and by a weak rupee (with 45% of revenue in India).
    • Sources: Vedanta results presentation; Financial Times; Wall Street Journal
  • Anglo and Codelco battle over Sur
    • Only days after Anglo agreed to pay $5.1bln for a 40% stake of De Beers, it decided to sell a stake of its Chilean Sur copper project to Mitsubishi for $5.4bln. The sale has led to disagreement with Codelco, which claims to hold an option on 49% of the total project, not just on Anglo’s share.
    • Sources: Anglo American press release; Financial Times; Wall Street Journal
  • Caterpillar chooses to produce in USA and Indonesia, buys into China

    Trends & Implications:

    • Though the results for Vedanta were not met with enthusiasm on the markets, they were in line with the strategy set out by the management in May: growth, long term value, and sustainability. Vedanta currently chooses to increase its market share instead of generating high profits, in the awareness that the current development will for a large part determine which companies will be the emerging market multinationals of the future.
    • The fight between Anglo and Codelco over the ownership stakes in the Chilean copper assets is flanked by a fight by Japanese co-investors and traders. Codelco sided with Mitsui to build its 49% stake at a low valuation, but Anglo found a way to get a higher price by selling part of the asset to rivaling keiretsu Mitsubishi.

    M&A overview update

    The M&A overview of the Business of Mining has been updated with Anglo’s 40% acquisition of De Beers.

    ©2011 | Wilfred Visser | thebusinessofmining.com

Vedanta Resources raises dividend

May 6, 2011 Comments off

“Vedanta Resources is banking on robust metal consumption in Asia to drive growth in 2011 as it announced a bumper dividend on the back of higher commodity prices in its full-year results. The FTSE 100 listed resources company anticipates ‘continued growth’ in zinc and copper demand from India and China in particular as it announced a final dividend of 32.5 cents per share for the year ending 31 March 2011. That brings the total dividend to 52.5 cents, up 16.7 per cent on the year before.

A year ago Vedanta announced it would boost its operations with the $1.5bn acquisition of Anglo American’s mostly African zinc assets. Vedanta declined to give specifics on the timing of a planned London flotation of its Zambian copper business. The business increased earnings by 190 per cent to $440m last year.”

Source: Financial Times, May 5 2011

Observations:

  • Vedanta’s fiscal year ends on March 31. EBITDA increased from $2.3bln in 2009-2010 to $3.6bln, mainly driven by increased iron ore and zinc income. The full profit increase was price-driven, with a small volume increase offset by an operational cost increase.
  • Zinc production in India still is the key pillar for Vedanta’s operations, contributing over 1/3 of total EBITDA. The Zinc India operations are controlled via Sterlite Industries, in which Vedanta holds a 55% interest.

Implications:

  • Vedanta lists 3 strategic priorities: growth; long term value; and sustainability. After completion of the Cairn India acquisition growth will mainly need to come from organic growth while debt is reduced. The company hopes to create long term value by cutting costs and rationalizing the complex group structure.
  • Sustainability has become a hot theme for the company after it was criticised heavily for social and environmental practices. An independent review by Scott Wilson was done at the end of 2010, resulting in a set of recommendations that will be implemented. The recommendations mainly focus on implementing the necessary policies, procedures, and governance structure to ensure compliance.

©2011 | Wilfred Visser | thebusinessofmining.com

The Most Influential People in Mining 2010

December 30, 2010 4 comments

2010 has been an exciting year for the mining industry. The Australian Super Profits Tax debate came to a climax; the iron ore pricing mechanisms was changed to a system related to the spot market after 40 years of benchmark pricing; the Western Australian Iron Ore Joint Venture between Rio Tinto and BHP Billiton was cancelled; BHP attempted to acquire PotashCorp; 33 Chilean miners were at the center point of global media attention when they were rescued after 68 days underground. Who have been the world’s most influential people in the mining industry this year?

The Business of Mining.com gives a top 25. Based on a combination of metrics on ‘Opinion Impact’ (both public opinion and boardroom opinion) and ‘Decision Impact’ (both for 2010 and for the future). The list features a combination of industry leaders, politicians, journalists, advisors and regulators. 24 men; 1 woman. 5 Australians; 4 South Africans; 3 Chinese, 3 Americans; 2 Indians; 2 Canadians; 2 Brits; 1 Guinean; 1 Kazakh; 1 Mongolian; 1 Brazilian. The figure below gives an overview of the 25 most influential people in mining in 2010.

(Blue dots: industry leaders; green dots: journalists; orange dots: advisors; red dots: politicians; black dots: regulators)

1. Marius Kloppers – CEO BHP Billiton

Heads the world’s largest mining company. Tried to add potash to the portfolio of the company by (unsuccessfully) offering $39bln for PotashCorp of Saskatchewan. Earlier in the year not only played an active role in the debate about the Australian super profits tax, but also in the attempt to form a Joint Venture for iron ore export from Western Australia. Is furthermore seen as one of the key drivers behind the change of the iron ore pricing scheme.

2. Tom Albanese – CEO Rio Tinto

Heads the world’s third largest mining company. Worked with Kloppers on the Pilbara iron ore JV, the new pricing mechanism for iron ore, and the lobbying against the super profits tax as proposed by Kevin Rudd. Used 2010 to restructure the capital structure of his company and to strengthen the ties with Chinese industry and government via various deals with Chinalco.

3. Roger Agnelli – CEO Vale

Heads the world’s second largest mining company and largest iron ore producer. Less well-known in the west than Kloppers and Albanese, but certainly a powerful leader in the mining industry. Secured development opportunities in Guinea and in potash production expansions while carefully building relationships with the Brazilian government and the new president: Dilma Rousseff.

4. Tony Clement – Industry Minister Canada

The man that killed BHP Billiton’s hopes of acquiring PotashCorp by imposing unacceptable conditions in order to secure the deal’s ‘benefit for Canada’.

5. Cynthia Carroll – CEO Anglo American

The only women in the list, heading the fourth largest diversified miner in the world. Led the company back to profits after a dramatic 2009. Was appointed chairman of related Anglo Platinum this year and holds directorships of De Beers and BP. Furthermore plays a role in the debates about the future of the industry at the World Economic Forum.

6. Graeme Samuel – Chairman of the Australian Competition and Consumer Commission

Head of the regulating body that was the key obstacle for the Joint Venture between BHP Billiton and Anglo American to export iron ore from Western Australia as the JV would have given the two companies a position that would threaten global competition.

7. Michael (Mick) Davis – CEO Xstrata

Heads the world’s fifth largest diversified mining company, build rapidly by acquisitions under the helm of Davis. Proposed a merger with Anglo American in 2009, and continues to look for expansion options. Plays an important role in the debate around a potential merger of Xstrata with trading house Glencore, the company’s largest stakeholder.

8. Kevin Rudd – Former Prime Minister Australia

The brain behind the Australian super profits tax, designed to skim the ‘excessive profits’ of mining firms. The public debate around the tax was one of the reasons Rudd was not re-elected. Although not in the office anymore, the idea of the super profits tax was implemented by the new government in an adjusted form.

9. Julia Gillard – Prime Minister Australia

Benefited from the drop in popularity of Kevin Rudd to take over the position of Prime Minister of Australia. Did involve the miners in redesigning the law into the Minerals Resource Rent Tax (MRRT), eliminating its major shortcomings. However, the new law, which will become active in 2011, will drastically increase profits for the mining operations in Australia, forcing many mining firms to re-evaluate investments.

10. Jacques Nasser – Chairman of BHP Billiton

The man behind the scenes at BHP Billiton. Worked with Kloppers on all major events this year, including the super profits tax, the Pilbara JV, and the PotashCorp offer. Appointed former British Minister Shriti Vadera on the company’s board and prepared the decision to restart high dividend payments to shareholders.

11. Xiong Weiping – President Chinalco

12. Anil Agarwal – Executive Chairman Vedanta Resources

13. Partha Bhattacharyya – Chairman Coal India

14. Ivan Glasenberg – CEO Glencore

15. Mahmoud Thiam – Minister of Mines and Geology Guinea

16. Sukhbaatar Batbold – Prime Minister Mongolia

17. Brad Wall – Prime Minister Saskatchewan

18. Xi Jinping – Trade Minister China

19. Vladimir Kim – Chairman Kazakhmys

20. Duncan Sloan – Global Mining Lead Accenture

21. Mike Elliott – Global Mining & Metals Lead Ernst & Young

22. William MacNamara – Mining Analyst Financial Times

23. Robert Friedland – Founder Ivanhoe Mines

24. John Chadwick – Editor International Mining

25. Chen Yan – Governor China Development Bank

 

©2010 | Wilfred Visser | thebusinessofmining.com

Mining companies fail to use YouTube

December 22, 2010 1 comment

YouTube has over 2 billion views per day. It is the world’s second largest search engine. It hosts more video material than has ever been broadcasted on television. Consumer goods companies use YouTube to scan for trends, market their goods and interact with potential customers. Still, mining companies fail to use YouTube.

Why should mining companies use YouTube?

Establishing a presence on YouTube can be a very effective tool in managing public opinion about the company. The YouTube user is not the investor or the business partner, but the average person using the mined goods. Mining companies are traditionally trying to hide from public attention. Most attention is negative attention, focused on environmental destructiveness and corporate greed. However, communicating with the world out there would help to make more people realize the relevance and the challenges of mining and at the same time serve as a way to gather feedback about the perception and public issues around the company. The public opinion has been a powerful weapon in the mining industry this year in both the decisions about mining tax changes in Australia and BHP Billiton’s attempt to acquire PotashCorp. YouTube can be a powerful  tool to influence public opinion.

How are mining companies currently doing?

The lack of use of YouTube by the world’s largest mining companies is shocking. Out of a list of ten of the world’s largest mining companies only 3 have established a YouTube channel (Anglo American, Rio Tinto, Vale); 5 appear to have claimed their channel’s name (Teck, Vedanta, Alcoa, Newmont, Freeport McMoRan), but are not yet using it, potentially because he name has been ‘hijacked’ by a proactive YouTube user. This is clearly the case for the remaining 2 companies (BHP Billiton and Xstrata). Their channels are broadcasting video material totally unrelated to the mining industry. Almost all of these firms have video material available on their websites that could easily be used to communicate on YouTube. The companies certainly do have a presence on YouTube: many videos about the companies have been posted by journalists and activists.

The performance of the 3 companies active on YouTube diverges widely. Anglo American started the channel in November 2010 and has posted 1 video about HIV Aids. Rio Tinto made a promising start in the summer of 2009 by uploading 10 videos about various topics, but the last visit date of the account owner is 7 months ago. Still, the videos have been viewed almost 400 thousand times in the past year. Vale has opened a comprehensive YouTube channel. The page and most of the videos are in Portuguese, but this makes sense when considering the geographic location of most of Vale’s operations. A point for improvement is the use of the channel to interact. The company has disabled the option to comment on the videos, making the channel a pure broadcasting station.

The importance of interaction

Simply broadcasting videos on YouTube is not the optimal way of using the site. People will react, and the reactions shape the public opinion. Responding quickly to the reactions gives an opportunity to show empathy, present the facts and win critics over. Below an example of reactions on Rio Tinto’s YouTube channel:

What happens when polluting industries find themselves surrounded by housing development? People get sick, the companies won’t move. This is the situation in Kilburn, South Australia, right now.

Rio Tinto may be a ‘leading mining company’, but it is also one with one of the most appalling international reputations. Type ‘bougainville’ + ‘mercenary’ + ‘RTZ’  into google to find out about their connection to atrocities in Papua New Guinea after the natives refused them permission to mine.

The reaction of Rio Tinto to these comments? Complete silence.  Missed opportunities to explain the company’s position to important opinion makers.

A 5-step guide for Mining Companies to start using YouTube

What should mining companies do to use the potential of YouTube?

1. Appoint a Content Manager – Appoint the person that will be running the show. The Content Manager should not just be responsible for selecting and managing the broadcasted content, but should also be responsible for participating in online discussions and answering to comments.

2. Explore the environment – Don’t plunge into uploading videos without finding out what is going on on Youtube and defining the strategy of content type and structure. For example, most likely YouTube users are much more interested in the environmental performance of the company than in the latest profit figures.

3. Establish a presence – Upload videos, add tags, select favourite videos featuring the company from other sources.

4. Monitor environment and reactions – Don’t only read the comments on the uploaded video’s. Do the same the YouTube user will do: search for information about the company; click-through to related videos; gather all user-generated content about the company.

5. Interact – Respond to both positive and negative reactions. Invite critics to explain, explain the situation and the facts. Feed the most important topics found online to the executive and marketing team.

©2010 | Wilfred Visser | thebusinessofmining.com

Vedanta delivers strong results, but faces operational challenges

November 12, 2010 Comments off

“The company reported revenues of US$4.6 billion and an EBITDA of US$1.3 billion in the first
half of this year due to higher volumes and realisations across all operations as compared with
the corresponding prior period. Operating profit was US$985 million and attributable profit
was US$337 million, a 39.4% share of net income.

US$479 million of free cash flow was generated after investing c. $1.1 billion in growth capex.
Net debt and gearing were $1.6 billion and 11.6% respectively. Gearing is expected to be less
than 40% after completion of the Cairn India acquisition, and is expected to reduce quickly
given the inherent cash generation of the group.”

Source: Vedanta Interim Results Presentation, November 11 2010

Performance:

  • Vedanta, the major Indian diversified mining company (although run from London), posted record profits, mainly driven by increases of zinc and iron ore prices. EBITDA margin of around 40% is lower than for some international competitors, but reflects the broad base of small mines the company owns in India.
  • The company is well positioned to be the supplier of choice for the rapidly growing Indian industry. The extension of its business into oil & gas and utilities helps the group to be rather self-sufficient, making it less dependent from poor national infrastructure than international competitors trying to enter the country

Challenges:

  • Upon analysis of the increase of EBITDA the results are not as strong as initially expected. The increase is fully explained by increase of commodity prices (see figure below). Volumes only increased a little bit, completely driven by iron ore volumes. In terms of cash costs, royalties and other comparable items the performance in the 1st half of fiscal year 2011 was actually worse than in the 1st half of fiscal year 2010.
  • The EBITDA breakdown is partly explained by the challenges the company is facing to comply with the rapid changes in regulatory environment in India. The company is struggling to get new assets up to speed as litigation for environmental and ethical/legal issues is forcing it into defensive positions. Apart from the iron ore operations, the low productivity in its mines does not seem to improve.

©2010 | Wilfred Visser | thebusinessofmining.com

India court orders closure of Vedanta smelter

September 29, 2010 Comments off

“Vedanta, the London-listed company founded by billionaire Anil Agarwal, has suffered a fresh blow in India, where a court has ordered the immediate shutdown of its massive copper smelter in the south, citing violation of environmental laws in a sensitive coastal area.

Tuesday’s ruling by the Madras High Court came a month after India’s environment ministry rejected Vedanta’s plans to mine bauxite in the eastern state of Orissa, and during a sensitive time as New Delhi is considering whether to allow Vedanta to take a $9.6bn controlling stake in Cairn India, a rival which operates lucrative and strategically important oilfields in the northern state of Rajasthan.

The copper smelter in question is the Tuticorin plant in the state of Tamil Nadu, which has been operating for more than 12 years and which Vedanta has been planning to expand.”

Source: Financial Times, September 29, 2010

Observations:

  • The copper smelter was forced to close because of emitting noxious air pollution and high levels of heavy metals, arsenic, and fluorides in the waste, leaking into the groundwater.
  • In the last months, Vedanta has also been in conflict with the government because of alleged mining on tribal lands before permits were obtained and buying ore from illegal mines. These conflicts arise from a new ethics law for the mining industry passed on spring of this year.

Implications:

  • 12 Year old processing plant typically don’t suddenly become more polluting, although an operational mistake might have led to temporary high levels of emissions. It therefore appears to be a change of policy of the Indian government (& court) that the plant has been forced to shut down.
  • The vigor of the Indian implementation of the new standards has surprised many experts, including the Vedanta board. However, it is clear that the competitive advantage Vedanta enjoyed because of less environmental pressure in India is coming to an end.

©2010 | Wilfred Visser | thebusinessofmining.com

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