Fraught Mining Asset Sales Are Creating Opportunities

Fraught Mining Asset Sales Are Creating Opportunities

$10 billion. $25 billion. The cash that analysts expected Rio Tinto and BHP Billiton to raise from asset sales just two years ago was being counted in the tens of billions. But it has not quite panned out that way.

Caught between plunging commodity prices and a small number of choosey, cash-rich buyers, the world’s largest diversified mining houses have sold far fewer assets than was broadly expected, earlier in the current mining downturn. Rio Tinto’s chief executive Sam Walsh, for example, was appointed in January 2013, promising cost-cuts and portfolio rationalisation, but Walsh warned would-be bidders that Rio was not running a “market day at the bazaar”. If the group could not realise what it deemed to be fair value, Walsh insisted, Rio would simply retain assets inside its sprawling portfolio.

And that is precisely what has happened. The group has completed around $3.5 billion of disposals in the last two years, versus up to $10 billion once predicted by analysts at Deutsche Bank.

The disappointment by BHP Billiton has been even bigger, whilst Walsh has unapologetically turned down offers for the group’s diamond business in northern Canada, its iron ore mines in Labrador and the rump of its unwanted aluminium assets. Offers just “weren’t in the bailiwick of where we thought they should be,” he has explained to the market.

Searching for Silver

The retentions show discipline, with Rio and BHP both snubbing low-ball offers, but as prices worsen and the downturn bites, increasingly rival miners are showing signs of giving way to a more hurried sales process, as they search the cupboards for silver.

Anglo American sold its Tarmac business in July and completed the sale of two copper mines in Chile last week for cash of $300 million (£192 million), rising to $500 million, depending on the copper price. The group also sold its Rustenburg platinum operation in South Africa to Johannesburg-listed Sibanye Gold earlier this month for 1.5 billion rand (£72 million), in what rival platinum bosses describe as a deeply discounted sale. “He’s a shrewd boy,” is how one platinum market veteran describes Neal Froneman, Sibanye’s chief executive.

Glencore, the worst performing stock in the FTSE 100 this year, is meanwhile pursuing at least $2 billion of asset sales, as part of a wider $10 billion capital raising drive announced at the beginning of this month. Master Investor exclusively reported on Tuesday that the group is pursuing a $1.4 billion deal with Vancouver-based Silver Wheaton and Toronto-based Franco-Nevada, selling gold and silver byproduct from its copper mines in South America.

No Stone Unturned

Glencore and Anglo American are down 60 and 42 per cent in London this year and whilst their assets under the hammer are all considered “non-core”, the speed and value of recent deals is in stark contrast to more measured steps taken by Rio and BHP earlier in the cycle.

Glencore is likely to realise full value under a streaming deal, thanks to healthy competition between the world’s largest gold streaming companies, but a bulk forward sale of its precious metal byproduct will increase its overall mining costs, by stripping out the byproduct revenue its mines currently receive. With gold and silver prices sitting at a 5- and 6-year low respectively, the group can also be likened to Britain’s former Labour government, which sold the country’s gold reserve at the bottom of the market in 1999.

On top of three unexpected mine sales in August, reports in the Irish Independent suggest Glencore is also eyeing the sale of its Pallas Green zinc deposit in Ireland’s county of Limerick, widely seen as one of Ireland’s most promising metal deposits. “Clearly Glencore is leaving no stone unturned as it seeks to cut overheads and debt,” wrote analysts at Investec. “The disposal of assets by heavily indebted large companies at this stage in the cycle is normal and gives smaller companies the opportunity to create value.”

Babies in the Bathwater

So if babies are being thrown out with the bathwater, which companies are using the current downturn to buy assets from mining majors? Below we profile seven listed companies that have snatched material deposits from the world’s biggest mining houses:

LUNDIN MINING is the base metals vehicle of Lukas Lundin, a Vancouver-based oil and mining billionaire. The company has copper mines in Portugal and the Congo and a zinc-lead mine in Sweden, but it also bought the ultra-high grade Eagle nickel discovery in Michigan off Rio Tinto in 2013, bringing the project into production. Keen to make the most of the downturn (and backed by Lundin’s deep pockets) the company also paid a thumping $1.8 billion for the Candelaria copper complex in Chile last year, which was being discarded by debt-laden copper giant Freeport.

LUNDIN GOLD (the gold sister company to Lundin Mining) has been no less contrarian, buying the Fruta del Norte gold project in Ecuador from troubled gold group, Kinross. The deposit boasts a whopping 14m-ounce gold resource and changed hands in 2008 for $1.2 billion, but with Kinross eager to exit Ecuador due to tax rate uncertainty, Lundin paid just $240 million in cash and shares.

GLENCORE has moved to sell assets in recent weeks, but over the course of the 4-year downturn, the group has been one of the industry’s most eager and active buyers. In 2013 for example, it bought a controlling stake in Rio Tinto’s Clermont thermal coal mine in Queensland for an upfront consideration of $250 million, equal to less than a quarter of the mine’s construction cost.

CASSINI RESOURCES is based in Perth and backed by rugged mining entrepreneur Mike Young. The company approached BHP Billiton with an offer for its West Musgrave nickel and copper deposit in Australia three years ago and was initially rebuffed, but when BHP shifted its strategy towards asset sales last year, Cassini picked up West Musgrave for just A$250,000.

KLONDEX MINES, much like Cassini, tried to buy the Midas gold mine in Nevada three times, but was repeatedly rebuffed by the mine’s former owner, Newmont. Only after the gold price crashed in 2013 did Newmont finally change its mind, selling the mine and mill to Klondex for $55 million.

NORTHERN STAR RESOURCES has been the industry’s sharpest and most prolific buyer of gold assets, paying around A$200m for five operating gold mines in Western Australia in a frenetic 12-months of dealflow. The buying binge was triggered by a decision by Canada-based Barrick and Denver-based Newmont to exit Australia and retrench to their core operations in North America, but ironically, a subsequent collapse in the Australian dollar means the country is now one of the most lucrative jurisdictions in which to operate.

SIBANYE GOLD strayed from its core commodity earlier this month, buying Anglo American’s Rustenburg platinum shafts for 1.5 billion rand (£72 million). But in a sign of the group’s intent, it quickly followed-up the deal with another acquisition, this time in South Africa’s distressed coal sector, buying the debt of Waterberg Coal for A$23 million.