Mining the Money
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Main types of mining-related investment
By far the greatest chunk of minerals-dedicated, long-term, financing has traditionally been tied up in equity. The “wall of money” represented by these stocks and shares – as determined by their market capitalisation – has dwarfed that of all other types of finance for the sector put together. While, as we have seen dramatically since mid-2008, the value of equity will continually fluctuate due to external factors (rise or fall of confidence in individual firms, the sector, and the “health“ of “the market” itself), it is by no means passive. Blessed with surplus cash (revenues) and instead of investing it in acquisitions or projects, a company may purchase (“buy back”) its own shares in order to boost their price and increase dividends to their own shareholders. A significant number of these will be directors of the company itself. Even in the leanest of times, a company may decide to make a “rights” issue to pay off its debts, hoping that institutional investors will retain their confidence and trust the .board to weather the storm. After all, when shares are at their low point, they are also cheap to buy.
Just eight years ago, the market capitalisation of all the world’s corporate miners, put into one metaphorical “basket”, did not match that of just one oil company (albeit the biggest), Exxon. Since 2002 the picture dramatically altered. Spurred primarily by metals, coal and cement demand from China and to a lesser extent from elsewhere in the Asia-Pacific region, by 2007 we saw unprecedented high market prices for gold, copper, iron/steel, platinum, aluminium, nickel and other materials. Exploration in Latin America and Africa was at its height. In Russia, “oligarchs” favoured by Vladimir Putin amassed personal fortunes from mineral-related corporate acquisitions (notably with Rusal Aluminium’s merger with SUAL, followed by its takeover of Polyus Gold in 2006, and its major equity purchase in Norilsk Nickel in 2008) which put most other capital accumulation in the shade.
Little wonder, then, that by February 2008, market cap of the world’s five biggest mining companies had reached an estimated US$650 billion, while Exxon’s was little more than two thirds of this at US$456 billion. (Total market cap for all the world’s listed companies in Spring 2007 was over US$50 trillion [Reuters 3/3/07]). As UNCTAD’s 2007 World Investment Report acknowledged, a large part of this accretion in the mining sector was due to mining FDI (Foreign Direct Investment) made within lesser developing economies (China and India in particular); inside the FSU (Former Soviet Union); or by companies in the South buying into counterparts in the North. Again, this was especially characteristic of Chinese and Indian firms – notably Chinalco’s purchase, along with US-based Alcoa, of a 12% equity stake in Rio Tinto in early February 2008 (Alcoa sold its part of the stake in February 2009). This gambit was widely viewed, not only as providing a major footing for Chinese investment in the world’s second most important mining company, but also as a “poison pill” to deter BHP Billiton’s hostile attempt to absorb Rio Tinto.
However, the most spectacular example of such South-North movement of mining and minerals-directed capital was the snapping-up by Brazil’s iron ore giant, CVRD, of Canada’s Inco in 2006. (As of February 2008, CVRD - now called Vale - was also looking to buy out Xstrata, fifth among global corporate miners, although it seemed that Glencore, with its 35% ownership of Xstrata, would foil the attempt).
Outstripping any of these deals was the US$33.6 billion merger between Luxembourg steel producer Arcelor and Mittal Steel in 2006. The new ArcelorMittal is no, by far, this sector’s world leader. Though technically not classified as a “mining” enterprise, the company is committed to major iron ore exploitation – notably in Liberia.
The number of mining M&A’s somewhat increased during 2007, maintaining the pace of heady “smash and/or grab” of the previous two years, while the value of just two of these exceeded all previous transactions of the kind. In March 2007, Russia’s largest integrated aluminium producer, Rusal, merged with the country’s second largest, SUAL; absorbed some of the global bauxite, alumina and aluminium assets of Glencore; and became United Company RUSAL. This amalgamation is generally valued at around $US 30 billion - although UC Rusal has yet to make an IPO.
Not to be outdone, five months later Rio Tinto succeeded in a friendly bid for Alcan, the world’s second biggest aluminium producer. This was claimed by Rio Tinto to be the largest- ever financing raised, for any purpose, in the UK - and the fourth biggest in history. Underwriting the acquisition’s syndicated US$ 42 billion loan were: RBS, Deutsche Bank and Credit Suisse. Rio Tinto’s debt gearing rose markedly as a result of this transaction; and when aluminium demand toppled in the second half of last year, it was scarcely surprising that the British company almost fell on its face (if not its sword). At the time, however – and buoyed by the wave of other acquisitions in the mining sector – many observers viewed this as a bold, rather than rash, move to make.
2007 also saw the private Indian group, Tata (Tata Brothers), taking control of Europe’s second biggest steelmaker, UK-Dutch owned, Corus, at a cost of US$7.6 billion. A highly-diversified industrial conglomerate, Tata owns iron ore, coal and chromium mines in India, and is trying aggressively to lay its hands on mineral deposits overseas. Then, in March 2008, Oxiana Gold agreed a US$ 5.6 billion combine with Zinifex, to form OZ Minerals, Australia’s third-largest mining company (after BHP Billiton and Rio Tinto) and the world’s number two zinc producer [Forbes.com 3/3/08]. The deal was remarkable, not only for the sum involved, but also because few outside mining’s innermost circles had much idea what either company got up to and only a few years before both had been classified as mere “juniors.” With hindsight, this merger – like that between Rio Tinto and Alcan – seems somewhat foolhardy, but it made sense at the time. Who was to guess that, less than a year later, OZ Minerals would bow down to a takeover offer by a Chinese company, pitched at only just over a billion Australian dollars? [Bloomberg News Service, 17 February 2009]
It goes without saying that all this intense activity came to an abrupt halt shortly after the September 2008 crash, although many further deals continued to be done as falling share values stimulated “buying on the cheap”.
Investors, miners and governments have been trying to pick up the pieces since. A multitude of futures – whether attached to specific projects, mining companies, tax benefits to mineral-dependent countries, or the raising of funds - continue to be shrouded with uncertainty.
Nonetheless, it is instructive to compare the nature of mining-related financing as it existed “before the fall”, with what has been dispensed since.
Therefore the author has left in place the data (below) that was published in this document in early 2008, while adding summary figures provided in early 2010 by Ernst & Young [Ernst & Young, “2009: the year of survival and revival: Mergers, acquisitions and capital raising in the mining and metals sector”, London, February 2010].
* These summary figures are printed in bold italics and marked with an asterisk
The early 2010 and early February 2008 market value of the world’s biggest mining companies are set out in Table 1.
A summary of the value of the major mining M&As between 2001 and 2007 is to be found at Table 2.
Loan Rangers
In Financial Year 2007 the total in direct loans, for all purposes, issued by the World Bank/IFC came to US$ 8 billion, plus another US$4 billion “mobilised.”
[see: http://www.ifc.org/ifcext/annualreport.nsf/AttachmentsByTitle/AR2007_ExeSum/$FILE/AR2007_ExeSum.pdf]
In contrast, between 2000 and 2006, direct loans to, and debt financing of, the minerals industry involved at least fifty three banks (both private and state-owned,) insurers and other financial institutions, each providing from US$ 5 million to US$ 5,746 million in any one year (lower priced loans or debt-financing not included.)
This resulted in around US$ 178 billion (US$ 177, 864 million) being disbursed to mining companies during that period.
The amount of money “arranged” for the minerals industry – both in projects and for general corporate purposes - has been significantly more, coming to a figure not far short of US$250 billion (US$ 248,170.8 million) from the start of the new millennium until 2006. Known as a syndication, where more than one bank or “underwriter” (assurer) is involved (and headed by a “lead arranger”) this classification includes both loans (see Table 3 and Table 4) and bond issues (Table 5).
A view to a kill: the Bond market
The value of bonds, issued on behalf of mining companies in 2006 alone, outstripped that of all project funding granted during the previous five years (Table 5).
Traditionally, mining-related bond issues have been made in the US, Canada and the UK.
But the largest single issue of all during this year was made in Brazil (for CVRD). At US$7, 278 billion, this was nearly double all mining bonds issued the previous year.
The lead bond issuers for the mining sector were:
JP Morgan, Citigroup, Morgan Stanley and Merrill Lynch.
Project finance remains a key”
The amount of money put directly into mining projects per se, appears insignificant, compared to that provided through corporate loans/debt finance, or bond issues. (See above)
Nonetheless, just over 9 billion dollars (see Table 6) signifies more than a widower’s mite. More strikingly, over a third of this project finance was disbursed in only one year, 2006. As one commentator put it: “Project finance remains a key.” [Quoted in “Financing Global Mining”, op cit.] That is especially true once a company has completed its economic and other due diligence studies (which may or may not include social and environmental assessments), then seeks to present a “bankable feasibility study” to potential lenders. For junior companies – especially those fresh to “the market” – this is a critical stage, at which they may well stand or fall.
Tables
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