Merger mania grips mining industry in 2001

Against a rather grim backdrop that included an American economy slipping into recession, worldwide commodity deflation and a new war on terrorism, the big story in 2001 for the North American mining industry was the continued trend toward consolidation.

The consolidation game really got started in 2000 with a flurry of blockbuster deals, mostly among the base metal miners: Billiton beat out Noranda (NRD-T) to acquire Rio Algom; Phelps Dodge (PD-N) snapped up Cyprus Amax Minerals; Grupo Mexico assumed control of Asarco and Southern Peru Copper; Rio Tinto (RTP-N) succeeded in a hostile takeover of Australian iron ore miner North; Alcoa (AA-N) scooped up Alumax and then merged with Reynolds Metals; Alcan (AL-T) tied the knot with Switzerland’s Algroup; Newmont Mining (NEM-T) took over Battle Mountain Gold in a friendly, all-share offer; and Impala Platinum Holdings bought Toronto-listed platinum explorer Platexco.

But looking back, it turns out 2000 was just a taste of the even-bigger deals to come in 2001.

In March, scoring the largest merger in mining history, Australian metal and petroleum giant BHP and Britain’s Billiton closed their US$33-billion merger. The new entity, BHP Billiton (BHP-N), is a diversified colossus with interests in aluminum, iron ore, copper, chrome, manganese, coal, nickel, titanium-mineral sands, diamonds, and oil and gas. The merger vaults BHP Billiton to the status of the world’s second-largest mining and metals group, after South Africa’s Anglo American (AAUK-Q).

Even as the ink was drying on its merger agreement, BHP Billiton announced an all-cash $687-million takeover offer for Canada’s Dia Met Minerals in order to boost the major’s interest in the producing Ekati diamond mine in the Northwest Territories.

Elsewhere in the diamond world, a consortium comprising Anglo American, the Oppenheimer family and Debswana (co-owned by the Botswana government and De Beers) succeeded, after some twists and turns, in a US$20-billion unbundling bid for De Beers.

The deal eliminated the oft-criticized cross-ownership between Anglo American and De Beers, and ended more than a century of corporate history for De Beers as a South African-listed company.

In mid-year, a now-private De Beers launched a retailing joint venture with French luxury goods group LVMH Moet Hennessy Louis Vuitton. The agreement will see the latter sell diamond jewelry under the De Beers brand, with flagship stores to be established in New York City, London, Paris and Tokyo.

Anglo American also made news by taking control of problem-plagued Aussie nickel miner Anaconda Nickel and pushing Anaconda’s founder, Andrew Forrest, into a non-executive role.

Gold consolidation

In April, kicking off a series of corporate developments in the gold sector, Franco-Nevada Mining (FN-T) acquired a 19.9% interest in Australia’s biggest gold miner, Normandy Mining (NDY-T), in return for US$48 million in cash, the Ken Snyder gold mine and Midas property in Nevada, and some Australian assets.

The move essentially closed the door on any hopes for a renewal of Franco’s failed bid in 2000 to merge with South Africa’s Gold Fields (GOLD-Q).

Then, a few weeks later, Barrick Gold (ABX-T) shook the gold market with an offer to merge with its U.S. rival, Homestake, in a US$2.3-billion share swap.

The deal, which closed in late December, pushed Barrick’s already sector-leading market capitalization to US$9 billion and made the company — for the moment at least — the world’s second-largest gold producer, after South Africa’s AngloGold (AU-N).

The new Barrick is due to produce 5.7 million oz. gold in 2002 at a cash cost of about US$165 per oz., from a reserve base of 84.3 million oz. The company also has about US$900 million in cash, fuelling speculation about future acquisitions.

In the same month as the Barrick announcement (but this time to no one’s surprise), a couple in British Columbia that had been living together for years finally exchanged marriage vows: Teck swept its 50%-owned subsidiary, Cominco, off its feet for a cool $1.5 billion, or a 21% premium over prices of the companies before the announcement.

Having shared management and corporate philosophies for 15 years, Teck Cominco (TEK-T) was a reality long before these historic companies formally decided to merge and become (based on market capitalization) the fourth-largest base metal company in North America, after Phelps Dodge, Inco and Noranda.

With hindsight, the timing couldn’t have been better for Cominco shareholders, as zinc prices have since plummeted to new lows and the California energy crisis — which had given Cominco a cash windfall from power sales — has quietly abated, owing to the U.S. west coast’s slide into recession.

Norman Keevil has continued on as chairman of Teck Cominco, and Cominco President David Thompson has become deputy chairman and chief executive officer. Teck President Steven Dean and Chief Financial Officer John Taylor hold similar positions in the merged entity, which continues to produce zinc, copper, gold and coal.

Australian developments

There was some talk that Teck Cominco might be a white knight for struggling Aussie zinc miner Pasminco, but that scenario failed to materialize when it became clear that the latter’s debts were worse than expected, at around US$1.7 billion. Pasminco is now in receivership.

Elsewhere in Australia in 2001, junior producers Goldfields and Delta Gold decided to merge in a deal worth US$425 million. During fiscal 2001, Goldfields produced a record 614,769 oz. at a total cash cost of US$205 per oz. Coupled with Delta’s output, the new company will likely produce more than 1 million oz. per year in 2002.

In early September, in a story that is still being played out, AngloGold launched its hostile, all-cash bid for Normandy.

Two months later, however, Newmont countered with a friendly all-share offer for both Franco-Nevada and Normandy — a move that would, if successful, create the world’s largest gold miner.

“This is nothing less than the revitalization of the gold industry,” boasted Newmont Chairman Ronald Cambre in announcing his company’s offer.

The battle has since heated up, and both sides have upped the ante with cash enticements. Philosophical arguments have also broken out over the role of hedging in a company’s business plan: the pro-hedgers are gravitating toward AngloGold, whereas the gold bulls are emphatically in the Newmont camp.

Free State mines

Part of AngloGold’s cash sweetener comes from its recent, R2.2-billion cash sale of gold assets in South Africa’s Free State to joint bidders Harmony Gold Mining (hgmcy-q) and African Rainbow Minerals (ARM).

Among the Free State assets acquired are the Bambanani, Joel, Matjhabeng and Tshepong mines, which produced 1.3 million oz. in 2000 at an average cash cost of US$270 per oz. For the first nine months of 2001, they produced 908,000 oz. at a cash cost of US$233 per oz. and a total production cost of US$274 per oz., accounting for 17.3% of Anglo’s worldwide production and 8.3% of its earnings.

These mines are contiguous to Harmony’s and ARM’s existing operations, so that the acquisition represents a first step in the consolidation of the Free State region.

The acquisition will double ARM’s annual gold production to 1 million oz., making it the 10th-largest gold company in the world
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The Harmony-ARM joint venture also has an exclusive right to acquire Gold Fields’ underperforming operations in the Free State, namely Oryx and St. Helena.

Earlier in the year, Harmony purchased the Elandsrand and Deelkraal mines, collectively known as Elandskraal, from AngloGold for R1 billion (US$130 million).

In September, financially crippled junior Echo Bay Mines (eco-t) converted a large debt into common shares, effectively giving control of the company to Franco-Nevada and putting a large block of shares into the hands of Kinross Gold (K-T).

Later in the same month, Gold Fields got its first toehold overseas by buying WMC’s St. Ives and Agnew mines in Western Australia. Gold Fields is paying US$180 million in cash and issuing roughly US$52 million in shares. WMC will also receive a royalty on any production that exceeds the existing reserve base at the two operations.

In November, WMC was the focus of bids by Alcoa, its American joint-venture partner. However, relations between the two companies have grown increasingly bitter, with Alcoa’s chief accusing WMC’s of going back on his word when Alcoa’s US$5.8-billion offer was rejected.

CVRD

In South America, the number-one consolidator in 2001 was Brazil’s Companhia Vale do Rio Doce. Already the world’s largest iron-ore miner, CVRD strengthened its local dominance by buying smaller local competitors Ferteco and Caemi. After a 5-month investigation, the European Commission gave CVRD a green light for the takeovers.

The only significant consolidation activity in Quebec in 2001 was the 3-way merger involving Campbell Resources (CCH-T), MSV Resources and GeoNova Explorations. The merger effectively consolidates the Chibougamau camp under one roof and sets the stage for an eventual restart of the Joe Mann gold-copper mine and the Copper Rand copper mine.