MAC/20: Mines and Communities

Fires in the Iron

Published by MAC on 2009-07-07

If anything is certain in mining, it's that nothing is certain.

Rio Tinto recently reneged on its deal with Chinalco, which would have seen this massive Chinese state enterprise acquiring nearly 20% of the UK-Australian outfit.

Meanwhile, Rio - the world's number 3 miner - has been negotiating an iron ore joint venture with BHP Billiton (number one), something that would boost both companies to pole position in the global seabourn iron ore trade.

Then, on 1st July, Chinalco swallowed its anger at Rio and bought its full entitlement of shares in a Rio Tinto offering which was the fifth largest on record, but marked at rock-bottom prices. (What you get in quanity doesn't mean it will translate into quality over the longer term).

For some weeks now, China's steel industry association has stood out for a lowering of iron ore market prices to 40% of that in previous long term contracts, though it may be wavering [see article below], since it risks paying even higher spot prices for the metal.

And, according to the Sunday Telegraph, Anglo American (number five in the corporate mining hierarchy ) is looking to Chinalco for a deal which would be similar to that forsaken by Rio Tinto.

Anglo's aim, says the UK newspaper, is to fend off an unwelcome takeover bid from Xstrata (formerly the world's number six, but now even out of the top ten), which allegedly severely undervalues Anglo American, and has infuriated the company's workforce as it faces severe job cuts.

Anglo is itself an important seaborne iron ore provider, with output from mines in South Africa and Brazil projected to reach 150 million tonnes a year within the next decade.

As for Brazil's Vale (ranking number two in the global mining stakes), it's still not clear what stance the world's leading iron ore producer will take in relation to the current pricing "war."

Meanwhile, the oceans are theoretically open to smaller miners, unconstrained by high social and environmental costs. These include Vedanta's Sesa Goa subsidiary in India, which last month took over rival miner, Dempo, and clearly hopes to expand its existing sales to the Peoples Republic on terms that undercut those offered by the global Big Three iron outfits.

[Commentary by Nostromo Research, 1st July 2009]

Anglo American's attempt to ward off a bid from Xstrata

Reuters

29th June 2009

LONDON - Anglo American is building its defences against a 41 billion pound merger approach from Xstrata by plotting talks about a major Chinese investment, the Sunday Telegraph reported.

The newspaper also said Anglo American had reignited plans to appoint Sir John Parker as chairman and had made an attempt to recruit him in recent days.

The report said Anglo, which rebuffed a proposal from Xstrata to consider a merger of equals, is to open talks with Aluminum Corp of China (Chinalco) and an unidentified Middle Eastern investor about a partnership to inject hundreds of millions of dollars into MMX, its Brazilian iron ore business.

Meanwhile, the Sunday Times reported that Jim Leng, who recently stepped down as chairman of Rio Tinto, had been put forward as a potential candidate to succeed Sir Mark Moody-Stuart, who has announced his intention to step down.

The newspaper also names Niall FitzGerald, deputy chairman of Thomson Reuters and Paul Anderson, a director at BHP Billiton as candidates.

The Observer newspaper said South Africa's National Union of Mineworkers, with 317,000 members, had intervened in the proposed merger saying it would lead to "unacceptable" job losses.

A spokesman for Anglo American declined to comment on possible investment in the Brazilian iron ore business but said the process to appoint a new chairman was "progressing well".

© Thomson Reuters 2009 All rights reserved


Takeover Panel raps Xstrata over synergies with Anglo American

by Garry White

Daily Telegraph

30th June 2009

Miner forced to issue clarifying statement about potential benefits from deal.

Xstrata has received a rap on the knuckles from the Takeover Panel and was forced to issue a statement on Tuesday clarifying the potential synergy benefits of its proposed "merger of equals" with Anglo American.

This followed speculation in a weekend newspaper that potential merger synergies could be three times the $1bn (£608m) cited in the letter Xstrata originally sent to Anglo's board.

"Xstrata has quantified pre-tax synergies of over $1bn per annum by the third full year following completion of the proposed merger," the company said. "Gross one-off realisation costs of not more than $500m in total would be incurred in full in the first two years following completion.

"This estimate is the only one that has been reported on by Xstrata and its advisers. Any other published synergy estimate is not endorsed or supported by Xstrata."
The company is advised by Ernst & Young, Deutsche Bank and JP Morgan Cazenove.
Sources close to Anglo said that the speculation of additional synergies over and above the $1bn highlighted in the original letter could not be supported and welcomed the fact that the debate would now switch to focusing on the "strategic fit and lack of value."

On Monday evening, Mick Davis, Xstrata's chief executive, spoke to a packed room at Lord's Cricket Ground in London in an event hosted by the Melbourne Mining Club. He highlighted the value-creating benefits a decentralised management structure brings to a diversified mining group. The management culture at Xstrata is in sharp contrast to the centralised structure of Anglo.

Defending the concept of the nil-premium merger he cited the example of Glaxo-Wellcome with SmithKline Beecham, however, Mr Davis accepted that nil-premium mergers had to happen on a friendly basis. He argued that when both companies stood to gain from a transaction there was no need for a premium to be paid.

Mr Davis also said scale and diversity were the key to future value creation in the mining sector, however, he was constrained by what he could say on any potential deal because of market rules.

The proposed merger would create a company with a market capitalisation of about £42bn, allowing it compete on a level playing field with the largest mining groups in the world.
Xstrata shares fell 14.8 to 657.3p and Anglo shares lost 49½p to £17.63½


China lowers iron ore price cut demand-reports

Reuters

1st July 2009

SHANGHAI - China has softened its demands for a large iron ore price cut after failing to agree terms with global miners by Tuesday's deadline, Chinese media reported, the first sign of a possible compromise meant to restore annual supply deals and avoid a total breakdown of the benchmark system.

Citing officials attending a closed meeting of the China Iron and Steel Association (CISA) on Tuesday, Caijing magazine and the official Shanghai Securities News said China was still expecting a better deal than the 33 percent reduction agreed by Rio Tinto with Japanese steel mills, but offered an olive branch.

China is now ready to discuss a smaller price cut of 33-40 percent rather than its previous demand of a 40-45 percent reduction and hopes to end talks quickly, the Shanghai newspaper quoted a source close to the situation as saying.

No substantive discussions between CISA and the three global miners -- Rio Tinto and BHP Billiton of Australia and Brazil's Vale (VALE5.SA) -- had taken place over the last two weeks, Caijing reported.

Rio Tinto has shown no inclination to go lower than the one-third price cut, saying it is ready to sell to its customers on whatever basis they prefer.

Spot iron ore prices to China have risen by a fifth in just a month, and now trade at a 4-month high above $80 a tonne on a delivered China basis, equivalent to around $65 free on board. This is higher than the contract price of $61 that the Japanese and South Korean mills secured, giving miners the upper hand.

"By abandoning the benchmark price... Chinese mills run the risk that if the spot price rallies further, they could end up paying higher prices than the rest of the world," Macquarie analysts said on Wednesday in a report.

"The fact that spot and new benchmark prices have converged already must be a source of concern for the Chinese given that European, Japanese, Korean and Taiwanese import demand remains extremely depressed."

In another development, some domestic big steel mills have tacitly reached agreements with miners and issued letters of credit to buy iron ore at the price accepted by Japanese mills, the official China Securities Journal citing industry sources as saying.

Small Chinese mills, eager to fix production costs and prepare for demand upturn, had already signed private deals, ignoring threats from CISA that it would not recognise the deals and revoke import licenses. (Reporting by David Stanway and Alfred Cang; Editing by Michael Urquhart)


Rio Tinto reaps rights bonanza

AFP

4th July 2009

SYDNEY: Mining giant Rio Tinto yesterday confirmed a huge take-up for its record rights offering after investors snapped up the Australian portion, allowing it to pay off a large chunk of its heavy debt.

The dual-listed firm, whose share offer came at rock-bottom prices in Sydney and London, announced a 95 per cent subscription among Australian investors following a 97 per cent take-up in Britain.

Rio can now slash its debt bill incurred by last year's acquisition of Canada's Alcan. The offering, worth US$15.2 billion (US$1 = RM3.53), was the industry's biggest and the fifth largest in history.

The Anglo-Australian giant announced the move last month along with an iron-ore joint venture with fierce rival BHP Billiton, snubbing a massive cash injection by China's Chinalco.

"It's positive that the rights issue has been completed - it certainly takes a lot of stress off the balance sheet," said Michael Bush, head of credit research at National Australia Bank.

"It was a fairly heavily discounted rights issue so it was a bit of a no-brainer in terms of whether people should take it up. It's positive for Rio that the money's in the door and they can now pay down debt."

The new shares were issued at a price of A$28.29 (A$1 = RM2.80), compared with yesterday's closing price of A$49.60 for Rio's ordinary shares.

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