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
“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
- 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.
- 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
“African-focused copper miner Equinox Minerals (EQN.TO) offered C$4.8 billion ($4.9 billion) to buy Canada’s Lundin Mining (LUN.TO) in an unsolicited bid that threatens to scuttle Lundin’s rival C$9 billion tie-up with Inmet Mining. The cash and shares bid could kick off a bidding war for the base metal miner as near record copper prices and expected supply shortages spurs another round of consolidation in the global resources sector, analysts said.
The proposed bid comes just over a month after Lundin and Inmet Mining Corp (IMN.TO), a copper miner with operations in Spain, Turkey and Finland, agreed to combine and create a new Canadian copper mining major called Symterra, worth about C$9 billion ($9.2 billion).”
Source: Reuters, February 28 2011
- Equinox offers a combination of cash and shares, worth C$8.10 per share of Lundin; a 26% premium over current share price. This is more or less the price to which Lundin’s shares increased after the January 12 announcement of the merger with Inmet, but Lundin’s share price has dropped over 20% in the past 5 weeks.
- The proposed deal between Lundin and Inmet to form Symterra is a ‘friendly’ merger, in which the boards advise the shareholders to vote for the exchange of shares in a shareholder meeting (planned for March 14th). Equinox’ offer is a ‘hostile’ takeover: an official procedure in which an offer is made for all outstanding shares, for which no board approval or shareholder approval from the target is required.
- Equinox’ board presents the deal as clearly superior to the Symterra merger plan, using the short term growth perspective as key argument. The value driver for the Symterra deal would be the development of Inmet’s Cobre Panama project, for which it required the spending power of Lundin. The recommendation of Lundin’s board to the shareholders will be crucial for the outcome of the battle.
- A combination of forces of the 3 companies should not be ruled out, as it would maximize the synergies between the firms. This would create a player with copper output similar to Rio Tinto’s copper production. Clearly combining 3 companies would not only face integration obstacles, but would also depend heavily on the ability of the management teams to cooperate.
- Potential rival bidders for Lundin (and/or Equinox and Inmet) include BHP Billiton, Rio Tinto, Freeport-McMoran, Teck, First Quantum, and Chinese players. Vale communicated that acquisitions of this size would not be likely, though it would help the company to diversify. With the battle for ownership opened it would be surprising if more than one company out of the group of Lundin, Equinox and Inmet survives this year stand-alone.
©2011 | Wilfred Visser | thebusinessofmining.com
“Inmet Mining Corp.’s planned merger with Lundin Mining Corp. will catapult the combined 9 billion Canadian dollars (US $9.1 billion) miner among the world’s biggest copper producers as demand for the widely used industrial metal shows no signs of easing.
The combined company, to be known as Symterra Corp., will generate annual production of around 500,000 metric tons of copper starting in 2017, up from around an estimated 205,000 metric tons this year, ranking it among world’s top five senior copper producers. Chile’s Antofagasta PLC is the biggest copper producer, with output of more than 600,000 metric tons estimated for this year.
Inmet and Lundin, both based in Toronto, will combine five copper mines in Portugal, Spain, Turkey, Sweden and Finland with two huge copper projects—Inmet’s 80%-owned Cobre Panama operation, one of the world’s largest undeveloped copper projects with a mine life exceeding 30 years, and Lundin’s 24.8% stake in the Tenke Fungurume mine in the Democratic Republic of Congo. The initial phase of that project calls for a 40-year mine.”
- Although both headquartered in Toronto, Lundin and Inmet don’t have operations in North America. Most of the current production takes place in Europe, with focus of production in the future shifting to Asia, Africa and potentially Latin America.
- The market capitalization of both firms is roughly equal at $4.4bln. Inmet has demonstrated a stable performance over the past years with profit margin in the range of 25-50%. Lundin has not been as profitable yet, but has access to the promising Tenke Fungurume project.
- The main driver for the merger is combined spending power for the development of Cobre Panama and Fungurume and the dilution of political risk associated with operation in Papua New Guinea and Congo.
- Analysts point to the difference in corporate cultures of the two companies as a potential obstacle for smooth integration. The composition of the new board, with Inmet’s Jochen Tilk as president & CEO, indicates that Inmet’s ‘corporate citizenship’ culture might become dominant.
©2011 | Wilfred Visser | thebusinessofmining.com
China is rising as a global superpower in the mining industry. Ore from mining companies all around the world is shipped to Chinese ports to fuel the growth of the economy. Building relationships with Chinese government and customers is a top priority for many business leaders. However, few people in the industry know that China itself is a major producer of many minerals. This article explores the Chinese rise of production, the rise of demand, the rise of Chinese mining firms and the rise of investment and sketches the implications for the mining industry of the changing role of the country.
1. The Rise of Production
China’s mining industry is the world’s largest in many aspects: the country has 200,000 collectively owned mines1, employing over 10 million miners; it is the world’s major producer of coal, lead, zinc, tin and rare earth minerals and also ranks high in output of iron ore, gold, bauxite and other minerals.
The country has been a major producer for decades, but the enormous demand, the opening of the market to private investors and the introduction of modern mining techniques has boosted the productivity and production of the industry. Significant reserves of most minerals allowed China to grow the market share of mining output for all major minerals in the past 15 years (Figure 1). The growth of the iron metal content output share is even more remarkable when considering that Chinese iron ore typically has a very low metal content: while share of iron content grew from 14% to 15% since 1995, the share of gross weight grew from 24% to 37%2.
The largest part of worldwide reserves of rare earths, titanium, tungsten & molybdenum are in China. These minerals are crucial in the production of many high tech products, giving China a powerful position in international trade. Recently the country has demonstrated this power by implementing export quota for rare earth minerals, favoring the domestic high tech industry.
2. The Rise of Demand
China hardly exports any minerals; all domestic mine production is absorbed by the domestic. Value of total mineral exports in 2009 was a mere $0.2bln, 60% of which was molybdenum3. Until a few years ago the country was a net coal exporter, but the growing demand from the utility and steel industry has turned it into an importer. Though the country does not export ores, it has been building a large iron and steel industry, exporting at a total value of $53bln in 2008. In the same year the production of 500Mt of crude steel accounted for 38% of the world production2. In 2009 the imports exceeded exports, as steel companies responded to the crisis by cutting production. Stepping up production will turn the country into a net exporter of steel again.
“Vedanta, India’s biggest mining group, expanded its international operations yesterday when it agreed to buy Anglo American’s zinc mines in Namibia, South Africa and Ireland for $1.34 bn.
The all-cash transaction will help Anglo pay down year-end net debt of $11bn and bring its gearing level lower.”
Source: Financial Times, May 11 2010
- Anglo American announced the sale of non-core assets in October last year. The company is trying to regain momentum by focusing more on the core competencies around iron ore, coal and platinum.
- Vedanta will pay all cash from a war chest of over $7 bln, enabling them to make more moves like this in the near future.
- Anglo American is burdened by its high gearing and resulting interest expenses.
- Anglo’s strategy of announcing non-core assets seems to be paying of. Five serious parties were bidding for the Zinc-assets, with Vedanta finally paying a large premium. Other companies bidding are likely to include Vale, Xstrata and Chinese companies.
- Vedanta is betting on a strong zinc-price due to demand for galvanization (coating steel with zinc to prevent corrosion). With this transaction zinc accounts for over 50% of the companies profits, which makes it very sensitive to volatility. The company will need to choose to continue its focus on zinc and copper or try to invest additionally in aluminium and/or iron ore in order to become more diversified.
- Vale will be likely be prepared to pay a larger premium for Anglo’s potash asset in Brasil. The company declared the potash business to be a key priority, recognizing the fertilizer business will drive growth in this are in the coming decade.