miningmx
TODAY In Columnists ›
Jan de Lange

Anglo must merge

Jan de Lange | Mon, 13 Jul 2009 09:54
[miningmx.com] -- ANGLO American has selected the right chairperson in Sir John Parker - no matter what the South African government says. But this won't alter the fact that Anglo has become a takeover target.

In the global business world Parker is regarded as one of the one of the most talented company chairmen of his time. That's the reason why Minister of Minerals Susan Shabangu, who in the past week leading up to Parker's appointment was pressing hard for a black South African to be appointed to the position, immediately did an about-turn when on Friday morning the Anglo board announced its decision for chairperson.

She welcomed the announcement, as Anglo clearly needed the best available business leadership.

This does not mean that Xstrata's proposal of a merger between equals will be accepted. Indeed, this is an exceptionally opportunistic proposition because, among the world's top 10 diversified mining giants, Xstrata probably occupies the lowest rung. Its market capitalisation fell 87% last year to $9bn and, even after a damaging rights issue of one new share for every two existing shares in January, Xstrata still maintains a net 30% debt ratio.

But Xstrata's arguments in favour of a merger are convincing - not only for a possible Anglo-Xstrata marriage, but in the light of consolidation between the world's major miners which have grown into conglomerates over the recent resources cycle.

The five or six biggest global mining companies are so much larger than the rest that they would hardly grow by absorbing more of the smaller mining companies. The only viable growth strategy is organic - by taking on gigantic new projects.

The largest is BHP Billiton, with a market capitalisation of some $115bn by the end of last year. Vale, the Brazilian iron-ore producer, is the next biggest with a market cap of $60bn, and in third place comes China Shenhua, a Chinese company that was not even ranked among the top 20 a year-and-a-half ago, but now boasts a market cap of $50bn.

In fourth place is Rio Tinto, worth $35bn, and then Barrick Gold at $30bn, followed by Anglo with $28bn.

To become a mining supergroup, a mining group needs to have a specific minimum size. Anglo does not comply.

Its Minas Rio iron ore project in Brazil is the main reason the sudden downturn in the resources cycle caught Anglo off-guard, and forced Cynthia Carroll to cut the group's final dividend. Carroll borrowed $5bn to fund Minas Rio, but the resources downturn and the loan-servicing demands posed a threat to Anglo's cash flow.

Iron ore is the big shortcoming in Anglo's product portfolio. The group's only iron-ore mine, Sishen, near to Kathu, delivers some 37m tons a year. It's a prize asset, not only because it is the world's biggest stand-alone iron-ore mine, but also because of the quality of its lump ore, which is considerably more valuable than the fine ore produced by most mines.

The price of Sishen ore has apparently fallen more sharply than that of fine ore, but it is so sought-after that Sishen had no need to cut production, while the downturn forced the three iron-ore giants to reduce production by about a third. But the three majors each produce 200m-odd tons of iron ore a year.

Anglo's Sishen comes fourth, but is way behind the other three. The global market for shipped iron ore has risen from 442 m tons in 2000 to 845m tons last year. This year there will naturally be a decline, but when the global economy recovers iron-ore producers will again be masters of all they survey.

This is the reason Carroll thought it prudent to take on debt to build Minas Rio. Together with the expansions at Sishen and the Sishen South mine, its iron ore production will increase to 75m tons by 2012.

The problems that Minas Rio caused, however, Anglo showed that the group is not big enough to finance and execute such projects. Merger with another mining group of a similar size is the only option.

But it's certainly not clear that Xstrata is the solution. The group is proud of its decentralised company structure and holds Anglo's big head office up to shareholders as an expense item that can be eliminated. During a visit to South Africa, Thras Moraitis, Xstrata's head of strategy, conceded that Xstrata would probably have to compromise.

"It will probably have to be a structure like BHP Billiton's," he said. Billiton has six head offices for its various business units, which are divided according to product groups, and two smallish central head offices in London and Melbourne.

In the financial world post the crisis, where companies and the financial landscape in particular will certainly be more strongly regulated, Xstrata's company structure could easily be caught on the wrong foot.

The new Anglo chairperson will have to keep his finger on the pulse if he is to hold Carroll and her management team on the right course. A merger with another mining group may appear to be a solution, but it must then be the right marriage partner.

"Anglo-Xstrata" does not seem the appropriate solution.

*The writer is a shareholder in Anglo American.

** Sake24.com



MORE FROM OUR COLUMNISTS

  • »No sympathy for ArcelorMittal
  • »Eskom after Maroga, Godsell
  • »Eskom: Principle vs power
  • »Malema madness
  • »Eskom must prove competence
  • »Numsa's Nazi tactics
  • »Battle lines drawn in SA ruling alliance
  • »Platinum -- a hotbed of unrest
  • »Anglo must merge
  • »BEE's festering sore
  • »Heed Numsa, Tito

    • USER COMMENTS () Click to View
    COMMENT
    SHARE
    E-MAIL
    PRINT
    Add Your Comment
    No bad language or hate speech please.

    facebook de.li.cious Digg
    columnists

    Columnists

    MORE FROM OUR COLUMNISTS
  • › Fear and worry, the calling cards of the gold lover | Richard Quest
  • › Numsa's Nazi tactics | Jan de Lange
  • › Vulisango versus Simmers | Brendan Ryan
  • › Impala warns of 'toughest time' | David Mckay
  • › Central Rand Gold to be avoided | Brendan Ryan
  • › Are miners being shafted? | Sikonathi Mantshantsha
  • › Debt behind Anglo sale | Shaun Harris
  • › Christo Wiese goes for gold | Marc Hasenfuss
  • › Put up or shut up | Brendan Ryan
  • › Week turns sour for Carroll's Anglo | David McKay
  • › Week turns sour for Carroll's Anglo | David McKay
  • › Labour, Eskom to load 10% on Pt costs | David McKay
  • › Does Anglo need an Xstrata? | David Mckay
  • › Mining codes may be changed | David Mckay
  • › Law and justice | David Mckay
  • › Mvela may buy Optimum Coal | David Mckay
  • › Pedal to the metal | Sasha Naryshkine
  • › What is Mvela Resources buying? | David Mckay
  • › Diamond miner liquidated | Marc Hasenfuss
  • › Gaps in Sasol review | David McKay
  • › UG2: digging deeper | Marc Hasenfuss
  • › SA govt swings left, new mines head | Allan Seccombe
  • › Another day, another commodity | Marc Hasenfuss
  • › Gimme gold quarterlies | David McKay
  • › Barry Davison replies |
    • Most Read
    Commented
    Editor's Choice
    1. »Kumba halts cheap iron ore to ArcelorMittal SA
      by Allan Seccombe | 26 Feb 2010 13:12
    2. »Barrick chasing Randgold premium
      by David McKay | 28 Feb 2010 10:59
    3. »First Uranium soars on tailings news
      by Allan Seccombe | 26 Feb 2010 10:24
    4. »Petra sells diamond for $35.3m
      by Reuters | 26 Feb 2010 12:18
    5. »Barrick chasing Randgold premium
      by David McKay | 28 Feb 2010 10:59
    1. » Kumba halts cheap iron ore to ArcelorMittal SA
      by Kumba halts cheap iron ore to ArcelorMittal SA | 26 Feb 2010 13:12
    2. » Exxaro wants BEE equity changes
      by Exxaro wants BEE equity changes | 25 Feb 2010 16:39
    3. » Aurora defends gold mine plans
      by Aurora defends gold mine plans | 22 Feb 2010 18:07
    4. » Gold Fields lowers gold outlook, again
      by Gold Fields lowers gold outlook, again | 23 Feb 2010 13:38
    5. » Bateman exodus continues
      by Bateman exodus continues | 17 Feb 2010 17:02
    6. » Xstrata pays dividend, upbeat on markets
      by Xstrata pays dividend, upbeat on markets | 08 Feb 2010 10:58
    7. » AngloPlat turns the corner
      by AngloPlat turns the corner | 08 Feb 2010 17:07
    8. » Copper prices destined for record high
      by Copper prices destined for record high | 01 Feb 2010 14:29
    9. » Good prospects for gold
      by Good prospects for gold | 01 Feb 2010 19:30
    10. » Bernard Swanepoel's first platinum play
      by Bernard Swanepoel's first platinum play | 29 Jan 2010 16:43
    11. » Anglo Coal gets out of Venezuela
      by Anglo Coal gets out of Venezuela | 29 Jan 2010 10:37
    12. » Three new coal listings for the JSE
      by Three new coal listings for the JSE | 28 Jan 2010 11:09
    13. » Harmony streamlines ops, targets growth
      by Harmony streamlines ops, targets growth | 26 Jan 2010 09:59
    14. » Simmers settles board battle
      by Simmers settles board battle | 22 Jan 2010 11:43
    15. » Decision time looms at AngloPlat
      by Decision time looms at AngloPlat | 22 Jan 2010 08:40
    16. » Eddie du Rand quits Bateman
      by Eddie du Rand quits Bateman | 15 Jan 2010 13:21
    17. » Aurora buys DRDGOLD's ERPM plant
      by Aurora buys DRDGOLD's ERPM plant | 17 Jan 2010 10:42
    18. » Kazakh firm eyes Mvela
      by Kazakh firm eyes Mvela | 04 Jan 2010 13:41
    19. » Namakwa gets new Lesotho mine
      by Namakwa gets new Lesotho mine | 05 Jan 2010 15:28
    20. » Gold latest in decade of bubbles
      by Gold latest in decade of bubbles | 04 Jan 2010 10:40
    21. » BEE imbroglio to inform charter debate
      by BEE imbroglio to inform charter debate | 18 Dec 2009 08:00
    22. » Solomon regains Wesizwe control
      by Solomon regains Wesizwe control | 17 Dec 2009 15:12
    23. » Aurora says it is financially sound
      by Aurora says it is financially sound | 03 Dec 2009 17:26
    24. » Wesizwe is being "hijacked"
      by Wesizwe is being "hijacked" | 03 Dec 2009 02:00
    25. » DRDGOLD sells Blyvoor to Aurora
      by DRDGOLD sells Blyvoor to Aurora | 02 Dec 2009 15:18
    26. » Exxaro cuts mineral sands for coal
      by Exxaro cuts mineral sands for coal | 01 Dec 2009 17:44
    27. » Bakubung calls for its Wesizwe directors to quit
      by Bakubung calls for its Wesizwe directors to quit | 26 Nov 2009 11:36
    28. » Wesizwe Platinum wracked by coup allegations
      by Wesizwe Platinum wracked by coup allegations | 25 Nov 2009 11:51
    29. » Global gold hedge heads below 10moz
      by Global gold hedge heads below 10moz | 17 Nov 2009 13:34
    30. » Platinum deficit forecast for 2010
      by Platinum deficit forecast for 2010 | 17 Nov 2009 15:03
    31. » Uranium One cuts production target
      by Uranium One cuts production target | 16 Nov 2009 10:12
    32. » Is silver's salvation upon us?
      by Is silver's salvation upon us? | 13 Nov 2009 15:23
    33. » Maroga definitely out - Eskom board
      by Maroga definitely out - Eskom board | 12 Nov 2009 12:56
    34. » Ferrochrome users landed with SA energy costs
      by Ferrochrome users landed with SA energy costs | 12 Nov 2009 12:52
    35. » Eskom: Principle vs power
      by Eskom: Principle vs power | 10 Nov 2009 12:10
    special reports
    News Alert! Subscribe to our Free News Alert
    podcastsPodcasts
    Big opinions by big guys.     RSSRSS Feeds
    News delivered really simply.
    jobsJobs
    Current listings.     eventsEvents
    Current listings.
    jseJSE Listed stocks
    Real time resources data.
    special reportsFREE News Alert!
    Subscribe to our News Alert