|
pencilvanian
1000+ Penny Miser Member
USA
2209 Posts |
 Posted - 07/13/2007 : 19:00:51
|
You must be logged in to see this link.
MINING RICH SEAM OF MERGER MANIA
07/13/2007 05:55:45 AM EDT
THE INDEPENDENT
While politicians and environmentalists fret over the declining state of the globe's natural resources, the tycoons who run the giant mining groups are making sure they grab what is left while they can.
After weeks of speculation, British-based Rio Tinto is to pay $38bn (pounds 19bn) in cash for Alcan, the Canadian producer of aluminium, an essential material used to make aircraft components, soft drink cans and packaging. The deal, which will make Rio the world's largest mining company worth pounds 70bn, is the latest in a series of colossal mergers in the industry.
The value of deals struck so far this year has hit $139bn, according to research firm Dealogic, and could easily top last year's $220.5bn as analysts speculate over further mega mergers.
Rio's chief executive Tom Albanese clearly believes Alcan is a prize worth having, offering 32 per cent more than Alcan's overnight price. It is also a whopping 65 per cent more than the level Alcan was trading at when it was confronted with an unwelcome bid from rival Alcoa. So Rio, as anticipated within the industry, is gatecrashing the party after a behind-the-scenes auction, outgunning offers by other major mining houses. In a series of back-to-back meetings, Mr Albanese and the finance director Guy Elliott spent yesterday explaining the rationale behind their blockbuster bid to analysts on both sides of the Atlantic.
They showed impressive graphs and tables mentioning "attractive sector fundamentals" and Alcan's "sustainable low cost curve position", but Mr Elliott yesterday also summed up the deal in one word - "China".
Put simply, the insatiable demand from emerging nations such as China and India for raw materials to make everyday products like pots, pans and cans, cables to carry power systems, and packaging for goods, has sent the price of metals such as iron ore - key to the production of steel - copper, uranium and nickel rocketing on commodity markets.
When a mobile phone manufacturer is unable to satisfy supply, it builds another factory. When a brewery wants to produce more beer, it quickly expands the plant.
But mining companies cannot react like that.
They have to identify new deposits which can take years and cost billions of dollars and then create the expensive infrastructure to supply the materials to the marketplace.
So swallowing assets from another player is the quickest way of meeting supply and taking advantage of the price increases caused by the shortages in the first place.
Demand for aluminium has pushed up the price by more than 50 per cent in the last two years to $2,800 a tonne. One analyst said: "We are in an era where it is probably better to buy than to build, given the cost of infrastructure projects."
There has been an orgy of consolidation within the industry since 2004, coinciding with the rise in commodity prices which has left mining companies stuffed with cash.
Mergers are not new to the industry, which has been shaped by takeovers down the years. Rio itself became one of the leaders through a series of acquisitions in the 1990s, while the mineral resource group BHP Billiton was created out of a $15.6bn merger in 2001.
The Anglo-Swiss group Xstrata has spent $32bn on acquisitions over the past year, turning itself into the fifth largest diversified mining company in the world.
In what seemed like a game of mining musical chairs, Xstrata bought copper producer Falconbridge for $22bn, scuppering a plan by US copper miner Phelps Dodge for a three-way merger with Falconbridge and nickel miner Inco.
The dutch giant Mittal Steel mopped up Luxembourg-based Arcelor for around $43bn last year. In January, India's Tata Steel paid $12.9bn for British Steel. In May Pittsburgh-based Alcoa launched a $32.9bn bid for Alcan after two years of talks aimed at hammering out a friendly merger. One analyst called it "a deal that raises the bar in financial aggressiveness".
The sheer generosity of the prices being paid suggests a new urgency creeping into play.
In the past, mining companies were more cautious about over-expansion at the top of the cycle for fear of being caught out when prices slumped and having to mothball plants.
But there is evidence this cyclical behaviour is now in the past as commodity prices settle on a more stable path, underpinned by strong, sustainable growth in emerging economies such as China, India and South America.
As a result, companies are now paying full prices for acquisitions even at what appears to be close to the top of the demand cycle. Is this wise? What happens if demand suddenly falls off a cliff? What happens if there is a currency crisis forcing a country to cut back on its imports?
Guy Elliott justified the price being paid for Alcan. "It can all be summed up in one word,
China.
Our estimate is that the economy will continue to grow at around 15 per cent a year until 2015.
All right, it might not be in a straight line and there might be some blip along the way but as China passes through a period of high economic intensity, it is going to require enormous amounts of steel, copper and aluminium. We are already major players in the first two materials and this deal will make us a leader in aluminium."
Certainly, the combination of Rio and Alcan will be a formidable force as a supplier of aluminium and as an owner of the valuable bauxite deposits - Rio's existing Weipa deposit and Alcan's Gove, both in Australia - used in the manufacturing process.
Based in Montreal, the business will continue to be run by Alcan chief executive Dick Evans. One of the first priorities if the deal goes through will be to sell Alcan's unwanted packaging division.
The deal, which should also generate savings of around $600m a year, lifts it above Alcoa and Russia's Russal as the world's leading aluminium producer, while the combined reserves of bauxite is enough to last 50 years at current rates of production.
There will also be considerable advantages from Alcan's more modern and efficient smelters using cheap hydro power. Such is the attraction of the marriage that either company would be forced to pay the other $1bn if it reneged on the deal. Is that likely? Despite the hefty premium being paid by Rio, analysts are not unanimously convinced that it is a done deal.
A number of other very big players will be licking their wounds after witnessing Rio carry off the prize. In addition, it will leave Alcoa having to decide what to do next. It may not have too much time. The speculation is that Billiton could strike quickly.
Then, of course, there is the ever present issue of the private equity industry.
Would it find the pickings rich enough?
A report from Ernst & Young suggests private equity is indeed alert to the possibilities.
In the past it has kept a low profile, wary of the boom and bust cycles, but it could move in now that companies appear to be enjoying more stable trading conditions.
Not surprisingly, shares in all the major mining companies moved sharply higher, anticipating more corporate activity, although Rio retreated 4.5 per cent to end at 3,810p. One broker, Keith Watson at Evolution, suggested that Rio could be vulnerable to an approach from a private equity group or powerful Chinese interests.
One consequence of the deal is that Rio will divest itself of some of its "smaller" mining operations, raising the possibility of several billions pounds worth of disposals which should find plenty of buyers among the small-cap miners.
Is the commodity sector in a super-cycle?
YES
Are we in a commodities bull run; will it continue?
I always answer with a resounding nod because one of the main factors driving my conviction comes down to a simple fact -
supply and demand.
Look at the torrents of coverage the rampant Chinese, Indian and other emerging economies are receiving.
It seems there is no end in sight to their precipitous growth and hunger for commodities, though while I broadly agree this is true for the medium to long term, one must always be selective.
There will be rotation.
Though coal is the fastest growing energy source, it is also the dirtiest as far as carbon emissions are concerned. Hence, the demand for bio-fuels.
Uranium is currently viewed as the most environmentally friendly form of generating electricity.
However, demand is far outweighing supply. Nuclear energy is an increasingly important source with 430 power plants depending on uranium to generate energy, with 80 new plants under construction or planned for completion within the next 10 years.
We have entered a secular bull market for commodities that may well give the sector 15 years of further growth. Ian Henderson is manager of the JPMorgan Natural Resources Fund
NO
The super-cycle theory holds that commodity prices often rise in long-term cycles with the upward moves lasting 17 years or longer. The current upward move is believed to be driven by demand for raw materials from countries such as China and India. Commodity bulls believe prices have a long way to go from here and many investors have taken the theory to heart.
Although recognising that commodity prices have risen a lot already in the last few years, some believe this may be explained by the fact that prices had been very depressed for around 20 years previously. This meant investment in production was not forthcoming. Thus any increase in demand would initially cause prices to rise before increased production could catch up. Investor speculation would only serve to exaggerate the effect.
But all this does not necessarily presage a super cycle. Higher prices in themselves encourage the supply and demand equation to rebalance as investment in production becomes more attractive and raw material usage becomes less attractive. Observing that investor speculation tends to drive markets ahead of events, I am inclined to be cautious. There is a fair chance much of the fundamental supply and demand imbalance may already be in the price.
Kevin Godbold is an investment analyst at Fool.co.uk.
I should have chosen "Cut-n-Paste" as a forum name, since that is what I do, mostly.
|
|
Mining & Metals consolidation
Forum Locked
