MAC: Mines and Communities

London Calling on a Canadian corporate scrap

Published by MAC on 2006-05-19

London Calling on a Canadian corporate scrap

by Nostromo Research

19th May 2006

Put another biddy in the nickelodeon!

When Xstrata took over Glencore's share of the El Cerrejon mine in Colombia, back in March, we commented to a colleague that the UK-Swiss company "represents the ugliest edge of the industry. It doesn't care about mining per se, it's a speculative trader purely interested in ramping up the profits... it crouches like a tiger ready to pounce when it reckons the prey is close to its knees. Sometimes it will lose -as it did over its battle to acquire WMC; sometimes it will get the prize. What doesn't appear to have been mentioned in the press - surprisingly - is two obvious points.

"The first is that Xstrata's take-over strategy is, to a considerable degree, influenced by its dominant shareholder, Glencore, the world's most profitable (and shady) private trading company. Second, and linked to this, are Xstrata's recent plays in Latin America. It has taken over Glencore's one third of El Cerrejon in Colombia, thus confirming its status as the world's biggest exporter of thermal coal; it already has Alumbrera in Argentina - one of the world's biggst copper producers. And Collahuasi (the world's fourth largest copper producer is now in its sights, if it secures Falconbridge".

So, the announcement last week that Xstrata is acquiring the highly controversial Tinataya mine in Peru, followed swiftly by its all-cash bid for Canadian nickel-copper miner, Falconbridge, is writing on the wall as big and ugly as it comes.

What, one wonders (and are we alone in this?) will become of the agreement forged last year between Tintaya communities and BPHBilliton, hailed by many at the time as a "ground-breaking" accord which granted some pre-emptive rights to those who'd suffered from the mining operations for a number of years?

That's just one of many urgent questions which should now be asked.

Rio Inco?

There's been recent speculation that Xstrata's Mick Davis has been talking with Teck Cominco, the world's biggest zinc producer.

Falconbridge is meanwhile huddling with Inco as both companies prepare a fight to the death against last week's bid by Xstrata for Falconbridge and Teck Cominco's for Inco.

Canadians are up in arms against Xtsrata, not least the powerful United Steelworkers (USW), which says it represent 8,500 workers in both Inco and Falconbridge. The union has already endorsed last year's proposed merger betweeen Inco and Falconbridge. According to the USW's Ontario/Atlantic director, Wayne Fraser, this is "the first step in keeping Xstrata out...Xstrata and its largest shareholder Glencore International share a history of union-busting."

Now surfaces, too, the rumour that Rio Tinto may soon "emerge" as a bidder.

In fact this prospect was aired back in October 2005 when, in an article headed "Rio eying new acquisitions? ", Miningnews reported Deutsche Bank's reaction to an exploration seminar held by the UK giant. "We sense Rio Tinto's exploration spend is extending with the cycle to new geographies and commodities with higher risk exposures," commented Germany's largest investment bank ."Nickel at 2% [of the exploration budget] seems inconsistent with the emphasis on new markets - perhaps nickel is a possible candidate for acquisition by Rio?"

If so, what would Rio Tinto go for - Inco, Falconbridge, both together or even Teck-Cominco-Falconbridge should the pieces fall that way off the table? Is it outrageous to suggest that Paul Skinner may be holding informal discussions with Mick Davis, even as we write? And will BHPBilliton resist entering the fray?

Roll on the day when the entire base metal mining world is dominated by just one company - let's call it "BHPB-Rio Tinto" for argument's sake.

Sometimes it's really ennervating trying to lop the heads off so many hydras at once.

sources: Xstrata bid for Falconbridge (see below); "Bid spoiling tactics will not deter Xstrata or Teck Cominco", Jim Jones, Mineweb May 15 2006; Xstrata-Glencore union busting: Mineweb May 18 2006; Deutsche Bank on Rio Tinto: Miningnews, October 07, 2005

Xstrata makes 52.50 cad all cash offer for Falconbridge


17th May 2006

Xstrata PLC said it has made a fully underwritten all-cash offer of 52.50 cad per share for Canadian nickel producer Falconbridge Ltd.

The Anglo-Swiss copper miner, which already owns 20 pct of Falconbridge, said the combination of the two companies will create the world's fifth largest diversified mining company. Its offer values the whole of Falconbridge at 20 bln cad.

Xstrata also said it expects the offer to be substantially earnings and cash flow enhancing in the first full year of consolidation.

Falconbridge is currently also subject to a recently revised offer from Inco Ltd. Xstrata said its offer represents a 12.3 pct premium over Inco's all-share offer, based on the May 5 share price for Inco.

Xstrata pointed out that the Inco offer is unclear for shareholders as it is based on Inco's share price which is currently being inflated by an offer for the group from Teck Cominco Ltd. The Teck Cominco offer for Inco is conditional on Inco not buying Falconbridge so Xstrata points out that, if Inco is successful in its bid for Falconbridge, its share price will inevitably fall as Teck Cominco walks away.

Xstrata's offer for Falconbridge is open until July 7 and Inco has seven days to match it. Inco's offer is currently due to close on June 30.

BHP Billiton To Sell Peruvian Mine Tintaya To Xstrata In $750 Mln Stock-debt Deal

Real Time News

16th May 2006

(RTTNews) - Mining company BHP Billiton Ltd. revealed on early Tuesday that it has reached agreement to sell its Peruvian mine Tintaya to Xstrata plc for US$750 million, two months after it put the mine on the sale block. According to the company, the sale, which also includes nearby undeveloped deposits of Antapaccay and Corrocohuayco, is for an upfront payment of US$634 million in shares and the assumption of US$116 million of debt.

In addition, the Melbourne, Australia-based company said the sale includes a deferred payment component which would be determined shortly after completion of the deal, and is expected to be in the order of US$60 million, based on current price levels. Xstrata would make additional payments to BHP Billiton in specified circumstances if the future LME copper price reaches certain levels between July 2008 and June 2009, or the development of Antapaccay or Corrocohuayco proceeds prior to 2020.

BHP Billiton anticipates the sale to be completed within two months with an effective date of 1 June 2006.

During the last year, BHP Billition faced problems at Tintaya, temporarily suspending operations for a month following civil unrest in the nearby Espinar region. The local residents had invaded the mine demanding closure due to contamination, and also pressed BHP Billiton to make more social investment in the area.

In the third quarter ended March 31, 2006, material mined in the Tintaya totaled 15.96 million tones that declined from the same period previous year. Average copper grade declined to 1.26% from 1.56% last year. The mine's production of payable copper, and silver concentrate were down in the quarter, but the production of payable gold concentrate increased from the prior year.

Even after the sale of Tintaya, BHP Billiton expects to continue to maintain an active presence in Peru through its exploration activities and its 33.8% interest in Antamina.

The mining company, which is struggling to meet rising demand, is shedding its businesses recently, to match up with the competition. BHP Billiton, on May 9, said it has entered into an agreement for the sale of Southern Cross Fertilisers Pty Ltd, a producer of high-analysis phosphate fertilisers, to Incitec Pivot Limited. Southern Cross Fertilisers was originally acquired by BHP Billiton as part of the acquisition of WMC Resources Limited. In early March, BHP Billiton revealed that it has offered A$7.85 per share in cash to purchase the whole issued capital of WMC Resources, for a total value of US$7.3 billion. WMC fertilisers business was identified as a non-core asset at the time of the acquisition.

Meanwhile, in early 2005, BHP Billiton and Anglo American plc sold Samancor Chrome to the Kermas Group, a producer of ferrochrome and chrome chemicals, for an enterprise value of US$469 million. Samancor Chrome, a producer of ferrochrome, is a unit of Samancor, fully operated and owned 60% by BHP Billiton, and 40% by Anglo American.

In October, 2004, BHP Billiton and Alcoa Inc. (AA | charts | news | PowerRating) revealed their agreement to sell 100% of their respective equity interests in Integris Metals to Ryerson Tull for US$410 million in cash plus assumption of Integris' debt. Alcoa and BHP Billiton each owned 50% of Integris Metals. The transaction was expected to be completed by early 2005.

Meanwhile, in December 2003, BHP Billiton entered into agreements to sell its 33.6% interest in Highland Valley Copper mine for US$73 million, and 100% interest in Robinson mine for US$18 million, to Quadra Mining Ltd. Again in 2003, BHP Billiton's fully owned subsidiary Rio Algom agreed to sell its 25% stake in the Alumbrera copper-gold mine in Argentina to Wheaton River Minerals Ltd. for a purchase price of US$180 million.

Among the array of sales, BHP Billiton, on April 11, 2006 said it acquired exploration and production rights offshore Colombia, South America, for an undisclosed price. The company signed contracts with the national hydrocarbon agency of Colombia, Agencia Nacional de Hidrocarburos on April 7, 2006, which allow for oil and gas exploration and production from two offshore blocks in Colombia's Caribbean sector. BHP Billiton holds a 75% interest in each block and is the designated operator.

Among the rivals, Alcoa in mid-April revealed that it plans to divest its Alcoa Home Exteriors business, which manufactures and markets premium products for the residential construction and remodeling markets in the United States. The company noted that its Home Exteriors business has 1,400 employees, and generated revenues of about $600 million in 2005.

Meanwhile, Alcoa formed a joint venture recently with Shanxi Yuncheng Engraving Group of China to produce aluminum brazing sheet in Kunshan City, China, near Shanghai. According to the joint venture, the New York-based Alcoa would invest more than $95 million by acquiring 70% interest in the Shangai facility.

During the first half of fiscal year 2006, ended December 31, 2005 BHP Billiton reported profit attributable to members of BHP Billiton of $4.36 billion or $71.9 per share that climbed from $2.95 billion or $47.5 per share in the same period a year ago. Six- month Revenue was $15.29 billion, up from $12.80 billion last year.

Recently, a strike over the issues of wage increases, job security and vacation time, rocked BHP Billiton's Ekati diamonds mine.

During the third quarter, BHP Billiton had to face increased industry wide pressures. A shortage of people, equipment and supplies had led to tight labor markets and difficulty in sourcing construction and drilling plant and machinery, which in turn led to rising input costs. Further, currency strength against the US dollar added pressure. According to the company, these mounting difficulties challenge the ability of BHP Billiton to deliver development projects to budget. However, most projects currently remain on or ahead of schedule despite difficulties. In the opinion of BHP Billiton, the imbalance in demand and supply, caused by the demand growth in emerging economies and the lack of latent mine capacity, together with the pressures on construction costs, the availability of skilled labor and raw materials look set to continue for at least the next several years. However, the company said it is in strong position as they bring on new volumes to take advantage of strong demand and high relative prices.

On April 5, Credit Suisse raised its 2006 and 2007 earnings estimates for many of the metal and mining companies in its universe, on the strong start to the year and continued strength in key metal price drivers.Analyst David Gagliano noted that first quarter of 2006 was strong but volatile with quarterly average prices for the major metals exceeding the brokerage's forecasts by an average of approximately 20%, despite the mid-quarter weakness.

In early February, Prudential Financial lowered its rating on the copper industry to 'Neutral' from 'Favorable'.

In February itself, Prudential maintained its 'Underweight' rating on the BHP shares, with a price target of $25. Amid the protests by locals and various governments enacting royalty/tax bills on projects, the analyst viewed that mining companies are looking at riskier, non-traditional mining areas, like Russia and the sub-Saharan Africa.

BHP closed Monday's regular trading session at $44.80, down $2.99, on a volume of 6.82 million shares. For the past 52-weeks, shares traded in a wide range of $23.46 -$50.74.

Teck Cominco offers to buy Inco

TAVIA GRANT / Globe and Mail

8th May 2006

TORONTO - Canadian miner Teck Cominco Ltd. on Monday offered to buy rival Inco Ltd. for $17.8-billion in cash and stock, a move that would create the world's largest zinc miner and second-largest nickel producer.

The deal is contingent on Inco not completing its own proposed $12.5-billion offer for rival Falconbridge Ltd., made in October.

Vancouver-based Teck Cominco said it had been in takeover discussions with Inco last year, prior to Inco's Falconbridge bid. Teck Cominco already owns 8.9 million Inco shares.

"Our offer presents an attractive opportunity for Inco's shareholders in comparison to the Inco/Falconbridge transaction," said Teck Cominco's president and chief executive, Donald Lindsay. "Market sentiment indicates that the price required to ultimately acquire Falconbridge may be materially higher than the current Inco bid."

Under terms of the deal, Inco shareholders will receive $78.50 in cash or shares, a 20.1-per-cent premium over Friday's close. The offer is comprised of $28 in cash and 0.6293 of a Teck Cominco Class B share."Under our offer, Inco shareholders will receive a significant premium for their Inco shares, rather than seeing their company pay a premium to acquire Falconbridge."

The company sees cost savings of more than $150-million annually. Teck Cominco would finance the cash part of the offer using cash and an underwritten bridge facility.

Xstrata compra la mina de cobre Tintaya

Martes, 16 de mayo de 2006

Zug (Suiza) (dpa) - La compañía de materias primas suiza Xstrata anunció hoy que adquirirá del grupo británico-australiano BHP Billiton la mina de cobre peruana Tintaya por un monto de 750 millones de dólares, de los que 116 millones de dólares corresponden a deudas.

Asimismo, se acordó el pago adicional de hasta 110 millones de dólares, aunque esta cantidad no se abonará hasta dentro de algunos años y dependiendo de la evolución de los precios del cobre, entre otros factores.

Con la adquisición de Tintaya, la producción de cobre de Xstrata se incrementará en 120.000 toneladas anuales, indicó la compañía en su sede en la ciudad suiza de Zug.

Xstrata señaló que con la compra de Tintaya y la explotación de cobre en Argentina la empresa consolidará su posición como importante productor de cobre en América Latina.

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