Beyond Xstrata and Anglo American

With Chinese and Indian stock markets around 12-month highs, the two-tier global mining market gains more divide; 74 of the world's Top 100 mining companies may now be classified under the "developing country" heading.

JOHANNESBURG - 

While the Western media's relative obsession over Xstrata's bid to merge with Anglo American continues to take up burgeoning column centimeters, stock markets in China and India have in the background moved this week to 12-month highs, propelling the absolute value of listed mining stocks higher across the general region.

One third of the world's Top 100 mining stocks, measured by value, now hail from China, India and Indonesia, with the majority of those counted in China. The rapid rise of these stocks, many of which have only been listed in the past five years, again highlights the growing divide between miners inside and outside the wider developing world.

Some 74 names among the Top 100 are based in the developing world, or operate substantially most assets within broader developing regions. Among those stocks classified as based in the developed world, very few of substance have neglected opportunities to develop interests in developing countries, and continue with that trend.

BHP Billiton, the world's biggest diversified resources stock, conducts head office activities from sleepy Melbourne, Australia, but is spread across the globe. As at 30 June 2008, the group had some 41,000 employees working in over 100 operations in 25 countries. As a single commodity, however, iron ore dominates, thanks, of course, to China.

Earlier this month, BHP Billiton and Rio Tinto, No 3 and No 2 in the global seaborne iron ore trade, announced that BHP Billiton would pay Rio Tinto USD 5.8bn "for equity type interests at financial close" to take its interest in the two companies' Pilbara, Australia iron ore joint venture from 45% to 50%. This values the full joint venture at USD 116bn, more than the market value of any mining company in the world, bar BHP Billiton.

The iron ore joint venture shortly followed Rio Tinto's abandonment of its posed near-USD 20bn capital injection from smaller rival Chinalco, replaced by the announcement of a general rights issue to raise the equivalent of USD 15.2bn, and the deal with BHP Billiton. Unlisted Chinalco, a Chinese state enterprise, with stakes in listed Chalco and Jiangxi Copper, represented China's biggest attempt yet to spread its mining wings abroad.

Chinese miners have achieved fewer successes in offshore expansion than could otherwise have been the case; one success was the recent taking up of a stake in Australia's Fortescue, the new kid on the seaborne iron ore block. At home, however, China ranks high, globally, in a good number of mining sectors. China has indeed long ranked as simply big in global resources, and today ranks No 1 as a consumer of any number of raw materials.

China today ranks as the world's leading producer of coal, iron ore, gold, aluminum, antimony, barite, bismuth, fluorspar, graphite, lead, phosphate rock, rare earths, talc, tin, tungsten, and zinc. It is also global No 1 in pig iron and crude steel. China also ranks among the top three countries globally in the production of many other mineral commodities, such as molybdenum, titanium, salt, and sulfuric acid.

China ranks as the world's leading exporter of antimony, barite, coal, fluorspar, graphite, rare earths, and tungsten. There are opportunities for outsiders where China's demand exceeds supply: iron ore, copper, bauxite, chromium, cobalt, manganese, nickel, lead, potash, and, of course, oil.

Within developed nations, the Anglophile's preoccupation with the likes of Xstrata and Anglo American is likely to continue, missing what appears to be a far more important underlying trend story. Xstrata's charm offensive, of Wednesday last week, when it published a detailed "merger of equals" discussion document over its unofficial bid for Anglo American, after the initial proposal was completely rejected by Anglo American two Monday's ago, arguing that "the terms proposed by Xstrata were totally unacceptable", seems to throw up the ghost of a haunted medieval poet.

The Western world's most righteous people continue to drive this strange theatre. As a wire service reported today: "Xstrata's unwanted approach to rival miner Anglo American led to a late reordering of the world's top mergers advisers in the first half, restoring Anglo adviser Goldman Sachs to the No.1 spot above Morgan Stanley", two investment banks that continue to be showered in glory for their exceptionally good behaviour on an evangelic Wall Street.

Few so-called Western mining companies have managed to make any meaningful progress on China's mainland; Eldorado, as an example, operates the 90%-held medium-sized Tanjianshan Mine there, and a number of companies run exploration activities, but tangible happenings are uncommon either at the discovery or corporate level.

Beyond China, consolidation in the mining sector has been taking place over any number of years, sometimes at some expense. As a sampling, the global nickel space shows just how divided the global mining picture has become: prices peaked near USD 25.00/lb in mid-2007, and then collapsed to hit USD 4.00/lb during some of the darkest days of 2008, but have since recovered to over USD 7.00/lb.

Xstrata, easily the most acquisitive mining company across the so-called commodities supercycle from early 2002 to mid-2008, was heavily lured into the nickel cauldron, shelling out USD 18.9bn in cash in 2006 for nickel-copper digger Falconbridge. Xstrata continued with the theme in 2008, paying USD 2.9bn in cash for nickel specialist Jubilee Mines.

Vale, the world's No 2 miner by value, outbid Xstrata in 2007 for Inco, paying USD 18.9bn in cash. Russia's Norilsk, long the world's biggest nickel miner, and also major producer of a number of other metals from its Siberian supermine, was in 2008 lured into outbidding Xstrata for LionOre, paying USD 5.8bn in cash for operations that today are mainly under care-and-maintenance.

Today, few nickel miners outside China are making any real money to speak of. Within China, companies with a nickel focus are not doing badly at all; Jien Nickel is trading close to a 12-month high, while Russia's Norilsk languishes two-third below its stock price highs, seen during 2008. Chinese mining companies are the suppliers of choice, of course, to China's above-average economic growth machine, and, second, to the state enterprises administering the country's special additional spending on infrastructure, running into hundreds of billions of dollars.

Sooner or later, consolidation among Chinese mining companies will take on a serious tone; the motley crew hanging onto every next word from Xstrata CEO Mick Davis, and speculating on what Anglo American CEO Cynthia Carroll is doing in Brazil, could be left holding straws. Chinese mining companies no doubt will forge ahead in finding the cocktail, a strange and vile mix of charm and braggadocio, needed to make headway in mining acquisitions, mergers and joint ventures beyond the Chinese mainland.

At least one company in the broader region has qualified to order more rounds. India-founded London-listed Vedanta ranks as the world's most acquisitive mining company so far in 2009; an Xstrata that went to finishing school. In May came the news that Vedanta's Indian iron ore subsidiary Sesa Goa  would acquire Dempo Group's Goa mining assets, for the equivalent of USD 368m.

This will extend Vedanta's reach into the world's most lucrative mining franchise, seaborne iron ore. Vedanta's key operations are currently found in India, Zambia and Australia, and produce aluminium, copper, zinc, lead and iron ore.

In March Vedanta announced that it had agreed to buy Asarco's copper business for USD 1.7bn. Vedanta has an excellent track record of extracting costs out of operations; those at its group Zambian copper operations fell from over circa USD 3.00/lb to USD 1.50/lb in 2008.

In April this year Vedanta bought 9.5% in HudBay Minerals, a Canadian base metals business disgorged by Anglo American in October 2004. Vedanta, 57% controlled by India's Agarwal family, continues to show the kind of entrepreneurial flair that the Mittal family put into the creation of steel giant ArcelorMittal, here in building a world class bulk materials business.

Vedanta subsidiary Sterlite was listed on the NYSE during 2008, raising fresh equity of USD 2bn, ranking as the highest IPO ever by any Indian company in US markets. The IPO saw Vedanta's stake in Sterlite fall from 75.9% to 59.9%. Vedanta, Sterlite and Sesa Goa each rank among the world's top 100 miners, measured by value.

Disclaimer

MINEWEB is an interactive publication, with rolling deadlines through each day, commencing in the Sydney morning,  and concluding, 24 hours later,  in the Vancouver evening.  If you believe your side of an issue deserves inclusion, but has failed to meet one of our deadlines, you are invited to notify the Editor in Chief in Johannesburg, and we will include you in our editing and expanding on our stories. Email him at alechogg@gmail.com

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Sleepy Melbourne? Not that you mean to be condescending.... by A Meere on July 03 2009, 03:23 Find this comment inappropriate? Report it

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