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Mining the Money

Before The Fall

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Who finances What & for Whom?

Traditionally, 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 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 value 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 and management to weather the storm. After all, when shares are at their low point, they are also cheap to buy.

Just ten 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. After 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 capitalisation (MarCap) of the world’s five biggest mining companies had reached an estimated US$650 billion, while that of Exxon was little more than two thirds of this, at US$456 billion. (Total MarCap of all the world’s listed companies in Spring 2007 was over US$50 trillion [Reuters 3 March 2007]). As UNCTAD’s 2007 World Investment Report acknowledged, a large part of this accretion in the mining sector was due to FDI (Foreign Direct Investment) made between lesser developing economies themselves (China and India in particular) and inside the FSU (Former Soviet Union).

Companies based in the global South were also buying into counterparts in the North. Again, this was especially characteristic of Chinese and Indian firms. In 2006, Brazilian iron ore giant, CVRD (now known as Vale)snapped-up Canada’s Inco in 2006 which, at the time was the world's second most significant nickel miner.

Two years later, China's leading integrated aluminium producer, Chinalco’s purchase, combinged with the US aluminum company to purachse an equity stake in Rio Tinto. (Alcoa sold its part of the stake in February 2009). At the time, 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 from making a hostile attempt to absorb Rio Tinto itself. (In fact BHP Billiton later indefnitely postponed such a move).

Outstripping any of these deals had been the US$33.6 billion merger in 2006, between Luxembourg steel producer Arcelor, and Mittal Steel (run by the eponymous Indian magnate, Lakshmi Mittal). ArcelorMittal is now by far the largest outfit in the steel sector. Though technically not classified as a mining enterprise, the company has committed itself 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. After absorbing some of the global bauxite, alumina and aluminium assets of Glencore, it became United Company RUSAL (See: Oleg Deripaska).

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. However, Rio Tinto’s debt gearing rose markedly as a result of this transaction; and when aluminium demand toppled in the second half of 2008, it was scarcely surprising that the British company almost fell on its face (if not its sword). At the time of the deal, and buoyed up by the wave of other acquisitions in the mining sector, some observers viewed this as a bold, rather than a rash, move to make. Over the following two years, Rio Tinto had to spend much time and effort in compensating for what proved to be an untimely gaffe.

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 has recently been acquiring mineral deposits overseas.

In March 2008, Oxiana Gold agreed a US$ 5.6 billion combine with Zinifex, to form OZ Minerals, comprising Australia’s third-largest mining company (after BHP Billiton and Rio Tinto), and the world’s number two zinc producer [ 3 March 2008]. The deal was remarkable, not only for the sum involved, but also because few outsiders had much idea what either company got up to; just a few years before both Oxiana and Zinifex had been classified as mere “juniors.”

With hindsight, this merger – like that between Rio Tinto and Alcan – seemed 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 which was pitched at only just over a billion Australian dollars? [Bloomberg News Service, 17 February 2009]

After 2008: picking up the pieces

All this intense activity came to an abrupt halt shortly after the September 2008 credit crash, although many further deals continued being done as falling share values stimulated “buying on the cheap”.

Investors, mining companies and governments have since been frantically trying to pick up the pieces. There remains a wealth of uncertainty over the industry's future prospects, and from where it will source its future funding.

These issues are addressed in detail in the Introduction to this document [1].