Andre Wilkens, CEO, ARM
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» Xstrata in R2.4bn coal deal with ARM
» Will locked-out Xstrata turn to Africa?
» ARM deal accretive, but evils lurk

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Xstrata to give ARM power lift
David McKay
Posted: Sun, 12 Mar 2006

[miningmx.com] -- THE combination of Xstrata, the UK-listed diversified miner, and African Rainbow Minerals (ARM) in ARM Coal, the R2.4bn joint venture unveiled earlier this month, represents an interesting prospect – both as a coal player in South Africa, but also for ambitions both companies may harbour in Africa.

That follows the announcement that Xstrata was to sell part of its South African coal business to ARM, which would be held in a separate joint venture – ARM Coal. The deal is worth an estimated R2.4bn and represents a similarly structured joint venture Xstrata concluded on its chrome assets with another empowerment firm, Merafe.

However, the deal with ARM – South Africa’s largest black empowerment entity – looks more a prospect than the chrome transaction. There’s also the outside chance that the partners could mutually extract value by working together on projects in Africa.

Xstrata has failed to buy Australia's WMC Resources and, may be disappointed again after being outbid (so far) for Falconbridge, a Canadian firm. As a result, it may now be forced to turn its growth ambitions to Africa, where it already owns chrome mines in addition to coal.

For its part, ARM has set about growing its African (non-South African) business through 65% listed subsidiary TEAL Exploration & Mining, a Canadian registered business that has base metal and gold assets in Zambia, Democratic Republic of Congo and Namibia.

André Wilkens, CEO of ARM, said that TEAL has increased the group’s confidence in the possibility of building a strong presence in Africa, particularly while the market was so buoyant.

TEAL has investments in four base metal and gold projects in Africa, the first being its Mwambashi copper project, which could produce first metal in first half 2007.

Said Wilkens: “When we set up TEAL, we wanted a company that would have nothing else to do with its time than look at opportunities. We’re amazed at some of the things that we’ve been offered.”
We only see upside from where we are now
It’s worth remembering what powerful potential is offered by a combination of TEAL and Xstrata. One, a pan-African mining group with strong political contacts offered through the interest of Patrice Motsepe in TEAL; the other plugged into the US and European equity markets and assets that supply more cash than it really knows how to handle. Xstrata generated $1.9bn in after capex cash in the 2005 financial year and is well poised to grow by aggressive acquisition.

ARM has already indicated its interest in building a copper business, one of Xstrata’s foundations. “Copper is a commodity that we don’t yet have. But we’d also like to aggressively pursue the coal business as well,” said ARM investor relations manager Pieter Rorich.

Coal is exactly the type of asset that Lonmin wanted to add to its mix. Some of the market is exposed to spot prices but it can also be fixed in contracts.

Demand is robust and it fits in neatly with platinum and gold, as well as nickel and the other bulk commodity ARM owns – the ferrous metals suite of iron ore, chrome and manganese.

In terms of creating ARM Coal it hands ARM an effective 29% stake in South Africa’s third largest exporter of thermal coal. That includes about 20 million tons of capacity (about 19 million tons was produced in Xstrata’s 2004 financial year) and control of the R2.5bn Goedgevonden project that will produce about 6.5 million tons of coal/year – half of which can be exported, where there’s a premium.
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ARM inherits very little debt. Including the deal with Xstrata, net debt:equity will stand at 16%. Considering that ARM has about R7.3bn of project finance on its books, most of it already financed, the gearing is minimal. ARM’s financing for the Xstrata deal is restricted to R400m, representing the cost of buying 51% of ARM Coal, the firm that houses the partners’ interests.

That will continue to give ARM a free hand in financing its other growth options, which may include the deepening of its Modikwe platinum mine (held in a joint venture with Anglo Platinum). Or it may involve following its rights should TEAL seek further funds for development in Toronto.