Commentary by Nostromo Research, 1st July 2009
If anything is certain in mining, it’s that nothing is certain.
Rio Tinto recently reneged on its deal with Chinalco, which would have seen this massive Chinese state enterprise acquiring nearly 20% of the UK-Australian outfit.
Meanwhile, Rio – the world’s number 3 miner – has been negotiating an iron ore joint venture with BHP Billiton (number one), something that would boost both companies to pole position in the global seaborne iron ore trade.
Then, on 1st July, Chinalco swallowed its anger at Rio and bought its full entitlement of shares in a Rio Tinto offering which was the fifth largest on record, but marked at rock-bottom prices. (What you get in quanity doesn’t mean it will translate into quality over the longer term).
For some weeks now, China’s steel industry association has stood out for a lowering of iron ore market prices to 40% of that in previous long term contracts, though it may be wavering [see article below], since it risks paying even higher spot prices for the metal.
And, according to the Sunday Telegraph, Anglo American (number five in the corporate mining hierarchy ) is looking to Chinalco for a deal which would be similar to that forsaken by Rio Tinto.
Anglo’s aim, says the UK newspaper, is to fend off an unwelcome takeover bid from Xstrata (formerly the world’s number six, but now even out of the top ten), which allegedly severely undervalues Anglo American, and has infuriated the company’s workforce as it faces severe job cuts.
Anglo is itself an important seaborne iron ore provider, with output from mines in South Africa and Brazil projected to reach 150 million tonnes a year within the next decade.
As for Brazil’s Vale (ranking number two in the global mining stakes), it’s still not clear what stance the world’s leading iron ore producer will take in relation to the current pricing “war.”
Meanwhile, the oceans are theoretically open to smaller miners, unconstrained by high social and environmental costs. These include Vedanta’s Sesa Goa subsidiary in India, which last month took over rival miner, Dempo, and clearly hopes to expand its existing sales to the Peoples Republic on terms that undercut those offered by the global Big Three iron outfits.