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Sleeping mining giants awaken

<font face="Arial,sans-serif"><font size="2">The price of securing quality mines is rising, as Rio Tinto’s bid for Alcan shows,&nbsp;the FINANCIAL TIMES writes. </font>AS THE boom in commodities prices stretches into its fifth year, mining company executives are more bullish than ever.</font>

<font face="Arial,sans-serif"><font size="2">Rio Tinto is the latest company to predict a strong outlook for metals prices — and is putting its money where its mouth is.</font></font>

<font face="Arial,sans-serif"><font size="2">Tom Albanese, the UK mining group’s new CE, this month cast aside Rio’s reputation for caution with a $38bn agreed offer for Canadian aluminium producer Alcan, in the largest takeover bid the mining industry has seen.</font></font>

<font face="Arial,sans-serif"><font size="2">The fact that a company that kept out of the mergers and acquisitions fray decided to launch such an ambitious bid may give investors reassurance that the boom is not about to end. It will also put pressure on rivals such as Anglo American, Xstrata and BHP Billiton to unveil their own multibillion-dollar deals.</font></font>

<font face="Arial,sans-serif"><font size="2">Rio’s friendly bid trumped an earlier hostile $27,5bn offer from Alcan’s US rival Alcoa. </font></font>

<font face="Arial,sans-serif"><font size="2">When asked how he could justify paying a premium of 33% to Alcoa’s bid, Albanese said: “It’s all about China.” China’s strong economic growth and its hunger for raw materials such as copper, iron ore and aluminium have provided the foundation for sharp rises in commodities prices over the past five years. </font></font>

<font face="Arial,sans-serif"><font size="2">Prices have also been driven higher by new mines taking longer than expected to develop, because both skilled workers and specialist equipment such as drills have been in short supply.</font></font>

<font face="Arial,sans-serif"><font size="2">Mining executives say that neither the shortage of metals nor China’s demand for them will change any time soon, and that the growth of India will provide further support for commodities prices. They increasingly argue that this commodities cycle is in fact a “super-cycle” — a long period of higher prices last seen in the 1960s, when Japan was industrialising. </font></font>

<font face="Arial,sans-serif"><font size="2">Moreover, mining companies are starting to use the super-cycle theory as a rationale for a more aggressive stance on mergers and acquisitions. </font></font>

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<font face="Arial,sans-serif"><font size="2">While mining companies’ optimism about the strength of metals prices is one factor, there are other, arguably more pressing, reasons for the wave of consolidation. The western mining companies that have long dominated the industry feel they need to be as big as possible if they are to avoid becoming targets themselves. </font></font>

<font face="Arial,sans-serif"><font size="2">This bulking-up is also happening in the steel industry, where Mittal Steel’s € 27bn takeover of Arcelor transformed the competitive landscape. </font></font>

<font face="Arial,sans-serif"><font size="2">In both industries, executives argue that consolidation will bring synergies and more discipline in matching production to demand, helping to break the old pattern of boom and bust.</font></font>

<font face="Arial,sans-serif"><font size="2">Western miners, however, are keen to gain critical mass to compete with mining and metals groups from emerging markets. Companies such as Rusal and Norilsk Nickel of Russia, CVRD of Brazil and China’s Minmetals are growing fast and playing an increasingly aggressive role outside their domestic markets.</font></font>

<font face="Arial,sans-serif"><font size="2">Alex Gorbansky, MD at Frontier Strategy Group, a political risk consultancy, says Rio’s bid for Alcan is a sign the big western miners are nervous. </font></font>

<font face="Arial,sans-serif"><font size="2">“This is all about companies positioning themselves for the future structure of the mining industry, which will be dominated by state-owned companies from the developing world,” he said. </font></font>

<font face="Arial,sans-serif"><font size="2">This year, Norilsk Nickel demonstrated its growing strength when it beat Xstrata in the battle to control LionOre, the Canadian nickel miner. </font></font>

<font face="Arial,sans-serif"><font size="2">Rusal’s takeover of smaller Russian rival Sual to become the largest aluminium producer in the world was a major factor in making Alcan and Alcoa, formerly the biggest players, look vulnerable to takeover.</font></font>

<font face="Arial,sans-serif"><font size="2">Mining analyst Fiona Perrott-Humphrey says that the big western mining companies are waking up to the new dynamics of their industry and being less complacent. </font></font>

<font face="Arial,sans-serif"><font size="2">“The big guys have finally realised that the landscape has changed. First , this is not a normal cycle. And second , there are interlopers and competitors for assets out there that don’t have the same view of cycles. These competitors are suddenly empowered and confident about buying mining assets,” Perrott-Humphrey says. </font></font>

<font face="Arial,sans-serif"><font size="2">Rio’s bid for Alcan should trigger several other bids in the mining industry, as rival CEs will be reassessing their positions in the coming months. </font></font>

<font face="Arial,sans-serif"><font size="2">“It can’t be underestimated the ripples it will have in boardrooms around the world,” she says .</font></font>

<font face="Arial,sans-serif"><font size="2">The growing competition between western miners and emerging market producers reflects that high-quality mining assets are increasingly scarce. Established mines are reaching the end of their lives and few new major mineral discoveries have been made in the past decade.</font></font>

<font face="Arial,sans-serif"><font size="2">During the previous downturn in commodities prices in the late 1990s, large mining companies slashed exploration budgets and hundreds of smaller explorers went bust. The industry is now investing again, but it takes years to find new deposits and sometimes more than a decade to bring them into production, so effects of the previous cutbacks are still being felt. </font></font>

<font face="Arial,sans-serif"><font size="2">Although the large miners have impressive pipelines of organic growth projects, these will take time to fulfil their potential. Buying existing mines enables companies to cash in on high prices immediately.</font></font>

<font face="Arial,sans-serif"><font size="2">But the number of assets up for sale are dwindling. Many of the mines in production around the world are controlled by state- or family-owned companies, giving the big listed mining groups less choice in what they can acquire. “The number of world-class, large-scale assets that can be bought are finite. You could count them on the fingers of one hand,” says one London-based mining analyst.</font></font>

<font face="Arial,sans-serif" size="2">This means the price of securing quality assets will be high, and the kind of lofty price tag seen in Rio’s bid for Alcan could become commonplace. Financial Times </font>

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