Mining consolidation on cards
Cheap assets are up for sale
NOTHING drives change like necessity. The $1.4 trillion (R23 trillion) collapse in the value of mining stocks since 2011 is poised to reshape the industry as all but the strongest companies are squeezed by the lowest commodity prices in six years.
Rio Tinto Group and BHP Billiton are among the best placed to grab assets sold by rivals desperate to stem losses or pay down debt.
“We would be supportive,” Martin Gilbert, the chief executive of Aberdeen Asset Management, said yesterday. Aberdeen has more than $400 billion of funds under management and is the secondlargest investor in BHP’s London shares and the fifth-largest holder of Rio’s London stock.
“They are financially reasonably strong and the low-cost producers in the sector, so if there was an opportunity to consolidate, yes, clearly it would make sense to do so,” he said. Rio Tinto and BHP would likely use cash and shares in any potential deal, he added.
Aberdeen owns 5.7 percent of BHP’s London shares and 2.9 percent of Rio’s UK-listed stock. The two companies are listed in Sydney and London.
The rout in commodity prices, combined with a debt binge in the past decade by mine operators high on surging Chinese appetite for raw materials, means even past titans of the industry are trading at minnow valuations.
The Bloomberg World Mining index has plunged to its lowest since 2004 as Chinese demand falters. Anglo American, worth almost £50bn (R1.2 trillion) in 2008, is now valued at about £3bn.
“There are going to be fantastic assets available at distressed prices in the market over the next three to six months,” said Simon Grenfell, the co-head of global market commodities at Natixis.
BHP and Rio Tinto could raise as much as $21bn through share sales to strengthen their finances in preparation for snapping up bargains, Bank of America analysts led by Jason Fairclough said last week.
Financing
That would suck up a large chunk of the financing available for equities from investors, according to the analysts.
“What is certain about 2016 is that if current conditions prevail we will see a very different mining industry globally in 12 months’ time,” said Jeremy Wrathall, the head of global natural resources in London at Investec. “Those who haven’t got debt will reshape the industry. There’s going to be a shifting of the assets.”
Should BHP and Rio Tinto sell stock, this “might hasten the onset of distress of other more leveraged companies”, including Anglo American, Fortescue Metals Group and Teck Resources, helping to shake out better quality assets, according to Bank of America.
Copper will be a major target for the world’s two biggest mining companies.
Rio Tinto chief executive Sam Walsh and BHP counterpart Andrew Mackenzie have both said they would be interested in acquiring top-quality copper mines.
The market for the metal will shift to a deficit in 2016 after the biggest slump in prices. – Bloomberg