London CallingPublished by MAC on 2007-08-04
4th August 2007
Dances with wolves
Over the past year, it's become impossible to predict the nature of mergers and acquisitions within the minerals industry. Rio Tinto's friendly offer to buy-out Alcan - now virtually certain to materialise, thus thrusting the UK company to the top of the aluminium ladder - took most industry-watchers by surprise; not least (one suspects) its closet rival, BHPBilliton. Whether the world's biggest mining company will now attempt a takeover of Alcoa is moot. But then, so was Xstrata's hostile bid for Canada's Falconbridge last year - and that succeeded against the initial odds.
It wasn't so long ago that we conjured up the vision (ugly though it may appear) of a mining industry ruled by just two multinationals. That hasn't happened, for at least three major reasons. First, the Chinese regime has clearly settled for a strategy of joint ventures (to a lesser extent outright takeover) with both large and medium-sized companies in order to gain secure access to iron, nonferrous and speciality metals overseas. Second, capital markets (partly manipulated by come UK and US hedge funds) have gained access to - and boosted the fortunes of - a new brand of corporate player: notably Xstrata, Vedanta Resources and upstarts like of Nikanor.
Third, companies already endowed with vast mineral resources in Latin America, eastern Europe, Central Asia and, to a lesser extent, South Asia, aren't going to readily yield control over them to their Northern-based counterparts. As already pointed out in this column, "South-South" acquisitions - virtually un-countenanced a few years back – have substantially proliferated. An example of this is the Indian company, Jindal's, takeover of Bolivia's massive El Mutun iron ore deposits which was finally cleared last month.
This doesn't mean that the Big Three - BHPBilliton, Rio Tinto and Anglo American - are fighting for their lives. But, they've all recently had to push through deals which would have seemed excessively over-extended, if not downright hazardous, less than a decade ago. Such deals would have been impossible had metals demand (especially from China) not triggered the most formidable price rises in history and a recent rush by the major UK and Australian based companies (which now include Xstrata and Vedanta) to pre-empt competition from the likes of CVRD-Inco (iron ore and nickel), and Rusal and Sual (aluminium) and Kazakhmys (copper) or Kazatomprom (uranium).
It's in this context that we should view last week's successful entry by Anglo American into Northern Dynasty's vast Pebble copper-gold project in Alaska. This is not so much an aggressive, as a defensive, ploy. For some months, Anglo itself has been rumoured as a target for the predation of its peers (BHPBilliton and Rio Tinto). Now it's secured access to one of the world's richest copper lodes, but deftly pushed Rio Tinto (already a shareholder in Northern Dynasty) aside. Not that the world's most diversified miner will be floored by such audacity. After all, last year, it penetrated Robert Friedland’s stronghold at Ivanhoe, and seems well on the way to ultimately controlling Oyu Tolgoi in Mongolia - certainly a rival in prospectivity to Pebble.
It’s surely fascinating to view these maneuvers from the outside. Mining finance was once incredibly dull, with scarcely any movement going on between the upper echelons of the industry, the medium-size players, and the "bottom feeders". Now it seems that everything - and everyone – is up for grabs. The wasps have never thronged so stingingly around so many honey pots. And the big players appear more vulnerable, while wielding more financial power, than ever before.
But this is a false paradox. The money awash for minerals’ acquisitions is unsustainably speculative, dependent on increasingly shaky credit assurances and arbitrary (or manipulated) share prices. Five years ago, it was widely considered that that the bull market wouldn’t waver for at least ten years. Now it seems certain that it won’t last that long.