Like a black hole of energy, Glencore has sucked up coverage in recent weeks, dominating the airwaves. So here’s a roundup of the top mining stories that have been going under-reported, since Glencore’s demise began:
Rio Tinto Dumping Coal
M&A activity in iron ore and coal has been pitifully scarce, but Rio Tinto has broken the ice, selling its 40 per cent interest in the Bengalla joint-venture, a giant thermal coal mine in New South Wales, for a princely $606 million.
The deal brings Rio’s divestitures since January 2013 to $4.5 billion (or nearly $20 billion over 5 years), adding weight to the idea from Deutsche Bank that “there is daylight between Rio Tinto and its peers now.” But the deal also looks good for the buyer, New Hope Corp, which has patiently held over $1 billion of cash on its balance sheet since 2008, waiting to buy coal assets at a cyclical low.
At around $9 per tonne in the ground, analysts have called the valuation “full” and “attractive” from Rio’s side of the table, though that is based on thermal coal prices currently sitting around $56 per tonne, versus nearly $200 in 2008.
Taking a long term view and New Hope (which we flagged as a well-placed buyer of Australian coal assets last month) has therefore positioned itself nicely for a cyclical rebound, whenever it comes. “Even anti-coal lobbyists probably turn their lights on at the end of the day,” its chairman joked.
X2 Deal Overdue
Rio’s Bengalla mine, meanwhile, is only the smallest of three coal mines it is trying to offload in New South Wales. Its thermal coal division, Coal & Allied, also operates Mount Pleasant, Mount Thorley and the Warkworth mines.
Behind the scenes, rumours are swirling that X2 Resources, the private equity vehicle founded by former Xstrata boss Sir Mick Davis, is close to concluding a deal over the three deposits. Rio is engaged in an exercise of trying to recoup their book value ($3 billion including Bengalla), suggesting that its CEO Sam Walsh is hoping for at least $2.4 billion from any deal with X2.
If announced, it would mark the first acquisition by Mick Davis, since he very publicly raised $5.6 billion to snap-up distressed mining assets earlier this year. With JP Morgan reportedly willing to provide X2 with a further $8 billion in borrowing and Davis’ firepower is truly gargantuan.
Heading Further South
Another ragbag of assets frequently linked to Mick Davis is South32, the wincingly named spin-off from BHP Billiton, containing its former assets in silver, nickel, manganese and thermal coal in Colombia, South Africa and Australia.
History suggests that spin-offs in the mining industry should be treated with extreme caution: Peabody Energy for example, the largest coal miner in the US, spun-off its coal mines in West Virginia in 2007, creating Patriot Coal. The new company, it quickly transpired, was little more than a dumping ground for Peabody’s bulkiest pension obligations and by 2012, it had filed for bankruptcy.
South32 similarly holds some towering environmental liabilities in its nickel and smelting divisions, though that has not yet been the market’s focus. Instead, falling commodity prices have whacked the stock lower, down 32 per cent in London since its listing in May.
Goldman Sachs has described the new group’s cost-cutting strategy as “uninspiring”, whilst fund manager Anthony Sedgwick at Abax Investments, despite being a significant shareholder, has called the company “pretty dull and boring… one wouldn’t classify it as a raging success.” One lifeline however remains: its steadily falling share price has put South32’s market cap of $6 billion within reach of Sir Mick Davis, giving investors some hope yet.