Palabora Mining’s offer riles minorities
SOME minorities in Palabora Mining aren’t one bit happy about the deal they are being asked to support by accepting the offer put to them by a consortium of South African and Chinese entities, though many are chucking it in and selling. The buying consortium now holds more than 90% of the equity.
Palabora was previously managed by Rio Tinto, which held 57.7% of the issued equity.
It joined with Anglo American (16.8%) in selling the combined 74.5% controlling stake to the consortium for $373m.
I have puzzled over the two mining houses’ decision for some time. I can understand Rio’s position. It appears to have taken the view that it prefers its Southern African investments to be outside SA. It has sold off other assets in this country while buying new assets (notably coal) in Mozambique.
Anglo’s decision is harder to read. The company chose many years ago to concentrate on base metals, and iron ore and copper figure strongly in its portfolio. Given Palabora’s stunning potential in the iron-ore game through its magnetite, Anglo’s departure makes no sense, especially given that it is SA’s principal iron-ore exporter. It might have been deterred by the plan to extend the underground workings to extend the life of the mine.
There are a number of non sequiturs in the Rio-Anglo sale agreement as these affect minorities. Why, for instance, was the transaction settled in rand? Both principal sellers are based abroad and report in dollars. The conversion rate to the dollar at the time was R8.22. It is now R9.92/$, a depreciation of 20.7%.
Had this been written in the international currency, minorities would have benefited from the upside. Minorities would now be receiving $13.38 per share converted to rand at R9.92/$, or R132.73. Added to the 5% paid to compensate holders for the time elapsed, that would have totalled R139.37, compared with the R116.95 they are receiving.
As it is, they get nothing extra, though a shareholder acidly observed that the buying consortium received a 21% bonus from their dollar conversion.
That leads to the independent fair-and-reasonable opinion in respect of the deal signed off by auditor EY. In the circumstances of a 21% decline in the dollar value, a shareholder asks if this is really either fair or reasonable.
The two areas of greatest interest are the copper hedge and the magnetite stockpile. The copper hedge has cost Palabora a mint of money and the last set of financials report a hedge loss north of R1bn. The hedge has been settled and the effect on the company’s annual revenue will now reflect a significant potential improvement of about 11% a year.
The magnetite stockpile is currently 192-million tons, grading 55% iron ore. According to the 2012 annual report, a total of a further 7.45million tons at that grade will be mined over the next three years.
Revenue from magnetite increased to R3.14bn in the last half year, giving an operating profit of R1.5bn. And that was from selling 2.6-million tons.
The Industrial Development Corporation’s interest relates in part to its involvement with Iron Mineral Beneficiation Services’ plant at Palabora to beneficiate the magnetite reserves to produce material for use in electric arc-furnace steel making. Palabora’s above-ground magnetite stockpile has a life of about 32 years at current rates of use.
Hindsight confers an unfair 20/20 vision, but it is worth noting that Rio Tinto hasn’t been a blaze of glory lately — it has had to writedown assets of $14bn.
And it is said that what cost CE Tom Albanese his job (without benefits) was the $3bn lost by Rio Tinto Coal Mozambique when it bought the Riversdale Project in 2011. Moving the coal from the Benga mine down the Zambezi River by barge, the only way to make the mine viable, proved out of the question. Then it was revealed Rio had greatly overpaid for coking coal reserves that weren’t as large as it thought.
If this team can’t buy assets effectively, can it really be expected to sell them well? Not when Rio chairman Jan du Plessis admits that a writedown of the scale taken on Riversdale is “unacceptable”.