Big Iron’s Gamesmanship

The tectonic shift in the iron ore business dominated headlines during the 22nd trading week of the year, as Rio Tinto ripped up its US$19.5-billion proposed financing with Chinalco and struck a new deal to combine its iron ore assets with its erstwhile rival BHP Billiton on a 50/50 basis.

The Chinalco deal had infuriated many Rio Tinto shareholders from the get-go for so many good reasons: it smacked of panic in that it was struck at the bottom of the market in February; it heavily diluted existing shareholders and didn’t give them a piece of the action with something like a rights offering; it raised national security red flags in Australia; and it put in doubt Rio’s future pricing power because it was partnering with a major buyer of iron ore.

Rio Tinto managers finally gave in to the howls of protest, and traders responded by boosting Rio Tinto’s shares by 8% on the news. Overall, shares are up over 50% since February, mirroring the recovery in base metals prices.

The next cries of outrage will come from steelmakers, who correctly see pricing power shifting back to the big three seaborne iron ore exporters — Rio Tinto, BHP Billiton and Vale.

But it looks like the cleverly structured Rio-BHP iron ore JV will be able to withstand accusations that it breaches anti-competition rules. Under the JV, which stipulates separate marketing of production, Rio Tinto’s iron ore output will only rise 13% while BHP’s will fall 15%, so it’s hard to see how regulators such as the European Commission can block it once a few minor modifications are made.

Clearly, the game has already changed, with rumours that Rio Tinto’s Chinese iron ore buyers are on the verge of accepting a 33% cut in benchmark prices for iron ore fines, rather than the minimum 40% reduction they’d been pushing for in recent months and seemed close to securing.

These developments are great news for Canadian iron ore developers, too, who have suffered through a tough half-year but can now more confidently promote relatively higher valuations on their pounds in the ground.

For the Chinese government, the deal’s collapse is another embarrassment, as it once again shows that, more often than not, Chinese state-owned metals companies are a second choice or worse for top Western miners seeking major partners.

• Meanwhile, the International Stainless Steel Forum has calculated that first-quarter stainless steel production dropped by more than a third year-over-year, with most regions showing declines of more than 40%, with the exception of China, where production fell by just 10.3%.

Nickel inventories have thus been on the rise, but not dramatically so, owing to the shuttering of more than a fifth of global nickel production since the global economic downturn began.

The latest nickel mine to undergo indefinite suspension is Xstrata Nickel’s small underground Montcalm mine in Timmins, Ont. A geotechnical review showed structural damage to the mine after “unplanned ground movement” forced underground activity to be stopped in March. The company had once hoped to keep Montcalm operating until it was mined out in mid-2011.

On an optimistic note, global steel production has been on the upswing in recent weeks, and many analysts are forecasting continued recovery in associated nickel and molybdenum prices.

• The gold market attracts more than its fair share of conspiracy theorists. These theories provide comfort to those who can’t face the frightening reality that there are probably countless inept, competing conspiracies tripping over each other, and ultimately no one’s really in charge.

One recurring gold-bug conspiracy plot centres around suspicions that central banks don’t actually hold the vast amount of gold reserves claimed.

Well, a bit of that may be coming true at the usually very highly regarded Royal Canadian Mint in Ottawa, which has revealed that external auditors have been working since March to reconcile the mint’s written records with the physical stocks of gold, silver, platinum and palladium.

Estimates are that perhaps tens of millions of dollars’ worth of the shiny stuff is missing, and the mint hasn’t ruled out theft. A review is due to be released in late June.

Mint watchers haven’t had this much fun since the mid-1990s, when JAG Mines was claiming with a straight face that it hoped to commercially mine the Ottawa River for gold accidently dumped into it by the mint over the years.

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