MAC: Mines and Communities

London Calling muses on the latest bout of mining's merger mania

Published by MAC on 2008-01-25

London Calling muses on the latest bout of mining's merger mania

25th January 2008

In just over a week's time, RioTinto will know whether BHP Billiton is going to "improve" its takeover bid for the world's second largest mining company, and whether to recommend to shareholders that it be accepted.

Meanwhile, Rio Tinto has scheduled various disposals, and embarked on expansions, with the purpose of making sure BHP Billiton substantially increases its offer. Or - if it doesn't - that Rio can give the world's premier mining company a heavy run for its money.

Last Thursday, Rio Tinto announced a joint venture with Chile's state-owned Codelco which, though relatively small (US$ 20 million), presages a leading joint venture relationship with the globe's leading copper producer. (Two years ago, Rio Tinto embarked on a similar alliance with Russia's leading miner, Norilsk Nickel - pipping BHP Billiton to the post.)

Brazil's Vale (formerly CVRD-Inco), the biggest iron ore producer on the planet, is now also engaged in talks to acquire UK-Swiss conglomerate Xstrata. At present the odds seem to be against such a merger, with likely opposition from the Brazilian government. There's also displeasure on the part of Chinese steel makers who view any further consolidation in the selling of iron ore (of which they are the biggest buyers) as undermining their negotiating power.

All this fancy corporate footwork, dressed up in such hyperbole, must seem bewildering to the "ordinary wo/man in the street" - or up the mountain and down in the valley.

But in reality it's quite simple: boiling down to which multinational enterprises will control world markets for its most vital industrial metals - iron, copper, aluminium and nickel - by the close of this year.

And that should concern all of us.

Rio Tinto in Chile copper venture

By Rebecca Bream

Financial Times

24th January 2008

Rio Tinto on Thursday signed an exploration joint venture with Codelco of Chile, the world's biggest copper producer, as part of its efforts to bolster its defence against a takeover by mining rival BHP Billiton.

State-owned Codelco and Rio Tinto will explore the Exploradora prospect in northern Chile. Rio has an option to earn a 55 per cent interest in the project by investing $20m (£10.1m) in the exploration work, with the potential to increase its stake to 60 per cent. Bret Clayton, head of Rio Tinto's copper division, said: "This landmark agreement combines the strengths of two highly experienced copper producers. Together, we hope to unlock value from a highly prospective copper belt in the biggest copper producing country in the world. We look forward to a long and deepening relationship with Codelco."

Until now, Rio's only copper mining asset in Chile has been a 30 per cent stake in the giant Escondida mine, which is operated and 57.5 per cent-owned by BHP Billiton. Rio's other copper assets include the Kennecott and Bingham Canyon mines in the US and Indonesia's Grasberg mine. It is jointly developing Mongolia's Oyu Tolgoi copper project.

In November Rio rejected a £65bn takeover proposal from BHP Billiton, the world's biggest mining company, saying the offer of three BHP shares for each Rio share significantly undervalued its growth prospects. The two have since engaged in a war of words, particularly on the issue of which has the best iron ore assets in Western Australia.

After the UK Takeover Panel ruled BHP must make a formal offer for Rio by February 6 or walk away for six months, Rio unveiled several growth projects in the past few months in an effort to bolster its share price.

Shares in Rio Tinto rose 360p, 8.7 per cent, to £45.19 on Thursday. Rio's shares have consistently traded above BHP's three-for-one offer but the recent spread between the stocks has narrowed. Rio is trading at 3.26 times BHP's price against a peak of 3.53 times on December 4.

Copyright The Financial Times Limited 2008

Amid turmoil Vale and Xstrata talk $90-billion merger


The Globe and Mail

22nd January 2008

Brazil's Companhia Vale do Rio Doce (Vale) and Swiss-based Xstrata PLC - the global mining giants that snapped up Canada's major nickel producers Inco and Falconbridge - are in talks to combine, aiming to bulk up enough to contend with a new generation of resource sector behemoth. Vale is on the hunt for its largest acquisition yet, and depending on how events unfold, may bid for rival Xstrata or seek a deal to acquire aluminum assets once controlled by Canada's Alcan.

The aggressive South American miner confirmed yesterday that it is talking to Xstrata about a potential takeover, but said the discussions "had not produced any material result yet."

The statement was issued at the request of Brazilian stock market regulators after local newspaper reports said Vale was considering a potential takeover of Xstrata that could be worth $90-billion (U.S.).

A successful deal would create the world's largest nickel producer and combine production in the Sudbury Basin, creating the potential for roughly $500-million in cost savings, something that the mines' Canadian owners had failed to achieve after years of efforts.

Word of the talks comes amid a sudden and severe selloff in the global mining sector, driven by fears of a U.S. recession. Vale's stock sank 9 per cent in Brazil yesterday, while Xstrata shares slid 5.5 per cent in London.

Yet Vale also has its eye on other major conquests. According to sources, it is a possible buyer of the former Alcan assets, including extensive smelting operations in Quebec and B.C., that could come available in the wake of a separate mega-mining deal.

Headed by its charismatic, deal-making chief executive officer, Roger Agnelli, Vale wants to overtake BHP Billiton Ltd. to become the world's largest mining company. In a hotly contested auction for Alcan last summer, Vale was narrowly bested by Rio Tinto PLC's $38-billion, all-cash bid for the aluminum producer.

Now Vale may have a second chance to get its hands on Alcan's prized operations. BHP revealed in November it had approached Rio Tinto with an unsolicited $130-billion takeover bid. Sources have said that if BHP follows through with a winning offer for Rio Tinto, it will likely seek to sell some or all of the Alcan assets to satisfy antitrust concerns and help finance the weighty transaction amid a worsening global credit crisis.

"If BHP's bid for Rio Tinto succeeds, you can expect to see Vale back at the table for Alcan," said one person familiar with the companies.

Vale, already the world's largest iron ore miner and second-biggest nickel producer, said yesterday that it "continues to analyze several other options, involving different mining assets." The company, based in Rio de Janeiro, said these negotiations had not produced "concrete" results yet. Vale is exploring financing options with bankers but also warned it "considers that the current conditions prevailing in the global financial markets may constrain the realization of a major strategic move."

BHP's approach to Rio Tinto has inspired a new round of potential monster mining mergers as the world's leading resource companies look for new ways to channel record cash flows from the seven-year-old commodity boom. Surging demand from China's fast-growing economy has spurred record prices for metals such as iron ore, copper and nickel and a frenzy of mining takeovers.

Vale took over Inco last year for $19-billion, while Xstrata seized control of Falconbridge, Inco's crosstown rival in Sudbury, for $24-billion.

Xstrata has reigned as one of the sector's most aggressive raiders, but last month the Anglo-Swiss company's CEO Mick Davis signalled a possible finale to the commodity run when he mused publicly that the company might be for sale.

Xstrata is understood to have held talks with both Vale and British mining major Anglo-American PLC before the Christmas holidays. "We are constantly reviewing opportunities," Xstrata spokeswoman Claire Divver said, declining to provide details.

A transaction with Vale would need the support of Xstrata's largest shareholder, Swiss metals trader Glencore International AG, which owns a 35-per-cent stake. Xstrata is required to deliver all of the nickel it produces to Glencore, which then sells the metal. It is believed that Glencore would demand that the so-called "off-take" agreements continue under any takeover and might also seek a deal to sell some of Vale's production.

As well, Vale could be constrained by its unusual share structure, which gives the Brazilian government so-called "golden shares" and the company protection from an unwanted takeover.

Xstrata shareholders would likely prefer cash over Vale's stock that trades on the Bovespa in Sao Paulo. Considering the challenges and the sudden selloff on equity markets caused by the credit crunch, a Vale-Xstrata deal is "a hell of a long-shot," said a mining industry source who is close to both companies.

At a press conference last month, Mr. Agnelli was asked about Vale's potential interest in the Alcan assets should they come available from a BHP-Rio Tinto merger.

"That's a party we weren't invited to. We are just watching," Mr. Agnelli said.

Brazil's govt to oppose Vale-Xstrata deal - report


24th January 2008

(SAO PAULO) - Brazil's government opposes an attempt by mining giant Vale to buy Swiss-based rival Xstrata, a local newspaper reported on Thursday citing unnamed sources in the presidential palace.

The government has told BNDESpar, the investment holding company of the state development bank, and Previ, the pension fund for Banco do Brasil to vote against the deal, according to business daily Valor Economico.

BNDESpar and Previ are members of the group of Vale's controlling shareholders and hold seats on the company's board of directors.

High-ranking government officials believe the deal is expensive, too complicated and not in Brazil's interest, Valor said. It cited an unnamed cabinet member who argued that the timing of the deal is not right, given the high cost Vale would have to pay for Xstrata.

The report also said the government was against the way Vale planned to structure the deal, since a large amount of voting shares would end up in foreign hands. The government views Vale, a former state-owned company and one of Brazil's largest exporters, as a strategic asset that should remain Brazilian, Valor said.

Xstrata shares fell almost 5 percent on Thursday in London on the report, which left investors fretting that the deal might not go through.

Vale, the world's largest iron ore producer, said on Monday it was in talks with Xstrata about a takeover, a deal that analysts said could top $100 billion in one of the biggest mergers ever.

But Vale cautioned that the current turbulence in global financial markets posed a significant hurdle. Another Brazilian newspaper, O Estado de Sao Paulo, reported on Thursday that Vale was having trouble obtaining financing for the deal because of the adverse market conditions. (Reporting by Todd Benson; Editing by David Holmes)

Mergers between mining giants spells bad news for downstream users - China analysts

Any further mergers between international mining companies will definitely create an oligopoly over ore prices, and exert negative pressure on downstream customers, especially Chinese steelmakers and nonferrous smelters, Chinese analysts told Interfax Tuesday.

"A frenzy of mergers and acquisitions worldwide is a good indication that an industry is either in the prime of its life or waning. When it comes to today's miners, I think we can safely say that the outlook is fairly bright. The ongoing possible merger between BHP Billiton and Rio Tinto, and talk of Vale acquiring Xstrata, both indicate that miners are looking to consolidate the industry and gain a more powerful voice," EverBright Securities analyst, Wang Feng, said.

"The Vale-Xstrata tie comes at a time when Rio Tinto is busy fending off a takeover bid from BHP Billiton, which suggests that Vale is trying to ensure its market influence at a time when China is extremely thirsty for resources. Moreover, Chinese nonferrous metal smelters and steelmakers will see further raw material price hikes if overseas miners manage to further tighten their control over resources," Wang said.

Vale, formerly known as Companhia Vale do Rio Doce (CVRD), Monday announced that it is considering making an offer for Xstrata, and has already carried out exploratory discussions with the company. However, the company is still considering other possible acquisitions.

"A takeover of Xstrata by Vale would turn Vale into the biggest mining company in the world, with new ferrochrome, coal, copper, aluminum and zinc assets from Xstrata. However, a successful deal will require the green light from Glencore International, the commodities trading company that holds over a 30 percent stake in Xstrata," an anonymous official close to the industry told Interfax.

Rio Tinto brushed off BHP Billiton's three-for-one share offer in November last year, saying that it undervalued both the company and its potential for development.

"It has been said that BHP will increase the number of shares and cash to its offer. However, BHP will have to put its money where its mouth is by Feb. 6 this year, the date set by the UK Takeover Panel for BHP Billiton to either put up or shut up," Wang said.

"Previously, consolidation between global downstream smelters, for example ArcelorMittal, which is now the largest steelmaker in the world, kick-started consolidation between international mining companies, in order to be better able to negotiate over raw material prices. However, in the case of China, the smelting industry is relatively unconsolidated and companies are largely passive in raw material price negotiations. Moreover, the situation may get worse if domestic smelters don't get their skates on and speed up consolidation in the domestic market," a Custeel analyst, named Yang Shufang, told Interfax Tuesday.

Yang predicts that this year's annual contracted iron ore benchmark price will increase by between 40 percent and 60 percent from last year.

Vale, Rio Tinto Group and BHP Billiton currently control about 70 percent of the world's seaborne iron ore trade. In addition to iron ore, the three mining giants also produce aluminum, copper and energy products.

Xstrata is currently the fifth largest diversified metals and mining company in the world, where it holds top-five market positions for each of its major commodities.

Interfax commentary: The Vale-Xstrata team up is by no means a done deal. Xstrata, or subsidiaries thereof, are actively pursuing acquisition targets and there is still the possibility of additional players entering the fray, such as Anglo American. However, whether or not consolidation among the mining giants leads to price control remains to be seen, and importers are obviously anxious despite previous assurances that economies of scale would be of benefit to all.

The benchmark ore price negotiations are currently underway, and the market is currently beset by forecasting fever. The consensus among international miners is for an increase of between 40 percent and 70 percent from last year, although much higher levels have been put forward. However, analysts have suggested that a figure in the high teens at the least would not be a surprising outcome, particularly given current global economic uncertainties.

[Interfax China Mining and Metals, 25/1/08]


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