Buru Energy Looks to Brighter Future with Ungani

Almost four years since it first made the discovery, Buru Energy, and partner Mitsubishi, officially opened the Ungani oil field 100km east of Broome today.

In what the company hopes will be the trigger in a change of fortunes after a tough 12-month period, Buru will produce of 1250 barrels of oil a day at the site with the aim rising to 3000.

Buru received production licences from the Department of Mines and Petroleum in May, following on from the green light it received from traditional owners in April.

However the collapsing oil price put a serious dent in its ambitions for a big-ticket exploration program in the largely untapped onshore Canning Basin, where Ungani sits.

Ungani has produced about 450,000 barrels during two extended production tests spanning two years, with oil trucked to Wyndham for export to refineries. Production flow rates have been capped at 1250 barrels a day.

Buru chairman Eric Streitberg said Ungani was the first oil development in the Canning Basin in over 30 years.

“There was no modern precedent for the development and it took perseverance and co-operation between all the parties to make the transition from a greenfields oil discovery to the current production system,” Mr Streitberg.

Chinese Nickel Imports Jump to 6-Year High as Shortage Looms

Chinese Nickel Imports Jump to 6-Year High as Shortage Looms

China imported the most refined nickel in six years in a further sign that the world’s biggest consumer is drawing on global supply. Futures rose 2.4 percent in London.

Inbound shipments of the metal used to produce stainless steel surged 67 percent to 38,545 tons in June from the previous month, the highest since July 2009, and were more than three times the level a year earlier, Chinese customs data show.

Goldman Sachs Group Inc. and Citigroup Inc. are bullish on prices amid prospects for rising Chinese demand. Macquarie Group Ltd. sees a global shortage which may cut inventories further from a record. Stockpiles in London Metal Exchange sheds have already fallen to the lowest in almost two months. Some imports may have been for delivery against the first nickel contract to expire on the Shanghai bourse, said Celia Wang from Tianjin Zhongwei Group’s investment department.


“Huge imports arrived in China from LME warehouses as traders seek profits by delivering against the first settlement of a Shanghai nickel futures contract,” said Wang, the general manager. “Refined nickel imports are expected to remain at a high level into July.”

The Shanghai Futures Exchange started nickel trading in March and the July contract was the first expiry. The bourse is accepting metal from Moscow-based OAO GMK Norilsk Nickel, the top supplier, for settlement to ease concern about shortages.
Goldman, Citigroup

Prices climbed 2.4 percent to $11,980 a ton in London on Tuesday, the highest level since July 6, before trading at $11,875. Goldman expects rates to increase to $14,000 as the market heads toward a deficit next year, analysts including Yubin Fu wrote in a report dated July 6. Citigroup predicts a 2015 average price of $13,960 and maintains a bullish outlook.

Imports of ferronickel rose more than threefold on year to 62,511 tons, another sign China is seeking foreign supply.

An Indonesian ban on exports of nickel ore at the start of 2014 spurred China to stockpile the material and boost supplies from the Philippines, the only other major source. Inventories of nickel ore in China are now at their lowest since September 2011, according to data from Beijing Custeel E-Commerce Co.

China imported more than 100,000 tons of refined nickel in the first half for the first time since 2009 when buyers took advantage of a slump in demand after the financial crisis.

Grigor Says Talga and MRL are ‘Catalysts for Disruption in the Graphene Sector’

He says MRL is a new player in the graphene space with the ability to use the same single step, low cost graphene recovery technology

First he singled out Talga, now Warwick Grigor says he has found the other key player in the low cost graphene space.

The Sydney-based resources analyst who runs Far East Capital made headlines in Australian newspapers earlier this year when he proclaimed that he was putting his money where his mouth was and investing a large chunk of his own cash into Talga Resources (ASX:TLG) because of its single-step graphene process.

Now he has picked out another Australian company, MRL Corporation (ASX:MRF) and – again – invested his own money. He says there is room for both in an investor’s portfolio as they are operating in different fields. Talga is looking at a European hub (it is building a pilot plant in Germany and plans to supply European companies from its Swedish project) while MRL (whose deposit is in Sri Lanka) is looking to Asia and Australia as its markets.

As I have said before, Grigor is one of the most experienced Australian analysts of mining companies and, also this year, issued a detailed paper on graphene.

He says MRL is a new player in the graphene space with the ability to use the same single step, low cost graphene recovery technology that Talga “has been holding close to its chest”. His client note is advising taking up shares in MRL because of the differences in valuation: Talga’s market capitalization is A$54 million while that of MRL is A$12.2 million.

There are other differences: Talga’s orebody is much larger and wider, offering long life and technically simple mining conditions. MRL’s orebodies are narrow vein and underground with less amenability to drilling out to prove the size of the resource, but this is offset by the lower costs of working in Sri Lanka.

Another difference is the grade, says Grigor. Talga’s is around 25% whereas MRL’s is over 90%. According to his figure, Talga will need about A$30 million to get into production, MRL less than A$10 million.

He says at this junction Talga is knocking on the door of becoming an institutional-grade stock but has to kick a few more goals to get there, the obvious one being the successful commissioning of the pilot plant. “I don’t think there is much risk here, but the box still needs to be ticked,” write Grigor. By contrast, at A$10 million, MRL is still a private client stock at present; it is difficult to deploy sizeable sums of money into a company with such small capitalization.

Grigor’s second point, arguing that Talga needs to beef up its management team with respect to commercial operations, seems to have been satisfied. Last week Talga signed a non-binding term sheet with Haydale Graphite Industries, based in Britain, which would see the two companies collaborate on the development of finished graphene composite and ink products. [As Roger Bade, at London brokers Whitman Howard noted, “although there is no certainty that this collaboration will come to anything, it could give credibility that both companies – although going along separate routes – are amongst the best graphene plays out there”.]

Grigor draws comfort from the fact that his two picks are essentially non-competitive because of their separate regional focus.

“As each of these companies make progress, sentiment will rub off on other players in the sector as the graphene story becomes more credible,” he says. “Both companies will offer the lowest cost, purest forms of graphene available, so they will both be catalysts for disruption in the graphene sector.”

The Shanghai Stock Market Crash and China Gold Demand

What Does it mean for the future of the gold market?

At present, up to 12 trillion yuan stays in domestic residents' saving accounts. The launch of individual gold investment, therefore, will allow residents to change currency assets into gold assets. At the macro level, it will expand channels for changing savings into investment, thus adjusting the money supply; in the micro aspect, allowing citizens to trade and keep gold can improve social welfare, benefiting both the country and the population.

Moreover, with the dual attributes of common commodity and currency commodity, gold is a desirable instrument for hedging. Therefore, developing gold trade for individuals is practical." – Zhou Xiaochuan, Governor, the People's Bank of China.

Shanghai stocks have fallen over 30% since mid-June. The equivalent in U.S. terms would be for the DJIA to fall 6000 points to the 11,000 level – a crash by any definition. Most of the commentary on this important subject has centered around the potential contagion effect for stock markets in the rest of Asia and beyond. There is another aspect to the crash worth considering though, and that has to do with the effect it will have on Chinese gold demand.

The Chinese people, it is well known, already have a cultural affinity to gold. That attachment just received a shot of adrenaline. Prior to June, trading volumes on the Shanghai Gold Exchange (SGE) were already running 20% higher than the previous year. Now, with crash psychology affecting thinking up and down the spectrum of investors, SGE is reporting volumes off the charts. In early July, Want China Times reported that "SGE posted a record trading volume of 48.33 million grams in a single day in late June." (48.3 metric tonnes, a big number.)



Typically stock market crashes inspire gold demand. In the case of China, where the government and central bank encourage citizen gold ownership as a matter of public policy, that lesson could become enshrined in the national psyche. The important consideration for investors elsewhere around the globe is what effect even stronger gold demand from China will have on the gold price both now and in the future.

Flow of physical metal between buyers and sellers will govern prices in China not paper trades

Ever since 2011 when China's demand began to ratchet up, clients have asked how the price of gold could be stagnant to down under the circumstances. The short answer to that question is that price discovery for gold does not occur in the physical market, but in the multi-trillion dollar leveraged paper trade in London and New York – a volume that dwarfs the physical delivery market. Now China is about to challenge that price discovery mechanism through significant infrastructure changes slated to take effect by the end of the year.

This new construct has as its base China's fundamental understanding and goals with respect to gold as summarized by Peoples Bank of China governor Zhou Xiaochuan in our masthead quote above; its affinity for delivered physical ownership, as opposed to paper-based metal; and, the official measures it has undertaken to make inroads into the international gold market's price discovery mechanism.

To gain a better understanding of how China is likely to affect price discovery in the gold market, let's start with something of interest that surfaced as a result of the recent Shanghai crash. Financial Times reported rumors floating the markets that Goldman Sachs was responsible for manipulating stocks downward. Officials denied those rumors and a spokesman for the exchange stated that "foreign investors with access to the futures market via theQualified Foreign Institutional Investor (QFII) program were only permitted to use futures for hedging operations and are not allowed to make directional bets. 

All recent trades by QFIIs complied with regulations." Of course if any manipulation of stocks were to occur, it would be executed in the leveraged futures market where bets can be placed at pennies on the dollar.

Up until I read that quote I was unaware of the strict procedures governing foreign trading on the Shanghai Futures Exchange (SHFE), China's only futures trading venue. A further investigation, helped along with some links from Koos Jansen, the Netherlands based expert on China's burgeoning gold market, revealed stringent rules governing trade on the SHFE for domestic participants as well, though not quite as stringent as the rules for foreigners. 

At the heart of those rules, SHFE imposes strict position limitations and margin requirements on traders in order to keep price speculation (or directional bets to use its term) to a minimum. Futures trading in China, clearly is meant to serve as an adjunct to the physical market instead of the other way around as it is in western gold trading centers. 

Hedging is maximized. Speculation is minimized. Leverage is controlled within reasonable parameters.

Link SHFE "Operational Manual for Gold Futures Contract Trading"

China Cuts Interest Rates for Third Time in Six Months as Economy Sputters

China Cuts Interest Rates for Third Time in Six Months as Economy Sputters

China cut interest rates for the third time in six months on Sunday in a bid to lower companies' borrowing costs and stoke a sputtering economy that is headed for its worst year in a quarter of a century.

Analysts welcomed the widely-expected move, but predicted policymakers would relax reserve requirements and cut rates again in the coming months to counter the headwinds facing the world's second-largest economy.

The People's Bank of China (PBOC) said on its website it was lowering its benchmark, one-year lending rate by 25 basis points to 5.1 per cent from May 11. It cut the benchmark deposit rate by the same amount to 2.25 per cent.

"China's economy is still facing relatively big downward pressure," the PBOC said.

"At the same time, the overall level of domestic prices remains low, and real interest rates are still higher than the historical average," it said.

Sunday's rate cut came just days after weaker-than-expected April trade and inflation data, highlighting that China's economy is under persistent pressure from soft demand at home and abroad.

While the PBOC acknowledged the difficulties facing China's economy, it said in its statement accompanying the announcement that it wants to strike a balance between supporting growth and deepening structural reforms.

As part of these reforms, it lifted the ceiling for deposit rates on Sunday to 1.5 times the benchmark level, the biggest increase in the ceiling since it began to liberalise the interest rate system in 2012.

More Easing Ahead

Economists had said it was a matter of when, not if, China eased policy again after economic growth in the first quarter cooled to 7 per cent, a level not seen since the depths of the 2008/09 global financial crisis.

Indeed, some analysts have even said recently that the PBOC had fallen behind the curve by not responding aggressively enough to deteriorating conditions.

With China set to publish more key economic data on Wednesday, including industrial output and investment, the timing of the rate cut could add to worries that figures may disappoint across the board again, as they did in March.

For now, however, some were confident that policymakers can arrest the slide.

"Intensified policy loosening will help effectively halt the economic slowdown," said Xu Hongcai, a senior economist at China Centre for International Economic Exchanges, a well-connected think-tank in Beijing.

A cooling property market and slackening growth in manufacturing and investment have weighed on the Chinese economy. Annual growth is widely forecast to sag to 7 per cent this year, down from 7.4 per cent in 2014.

In an attempt to energise activity, the PBOC has now lowered interest rates and relaxed the reserve requirement ratio (RRR) five times in six months, and many economists believe more policy loosening is in store.

This is partly because despite the steady drum roll of policy easing, there are indications it has not benefited the real economy. Some data suggests banks are not passing on lower interest rates to borrowers, and credit is still not flowing to the sectors in most need of the funds.

"The effectiveness of the rate cut won't be very big," said Li Qilin, an economist at Minsheng Securities. "The PBOC has already cut benchmark interest rate by a total of 65 basis points, but borrowing costs have only fallen marginally."

Struggling Banks

Banks are also struggling as the economy founders. Lending has slowed, bad loans are piling up, and profits margins are getting squeezed as China liberalises its interest rate market. Banks' earnings reports last month showed profit growth hit a six-year low in the first quarter.

Given these challenges, the PBOC said it does not expect banks to pay savers the maximum deposit rate allowed by authorities.

And with the prospect that borrowing costs may stay stubbornly elevated, government economists told Reuters earlier this month authorities may ramp up state spending to shore up growth, in the hope that fiscal policy would work where monetary policy hasn't.

But Li Huiyong, an economist at Shenwan Hongyuan Securities, cautioned against thinking that lower borrowing costs would not trickle down to businesses and consumers at some point.

"Don't underestimate the cumulative effect of the cuts in interest rates and RRR," Li said. "This won't be the last cut.

"The rate could be lowered to 2 per cent at least, and we expect the economy to gradually stabilise in the coming two quarters."

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Chinese Demand for Silver Bullion Bars Halved in 2014

Silver bars weren’t very popular last year — especially in China, where demand fell by half.

Chinese demand for silver bullion bars dropped 52% in 2014 from a year earlier, to 6.2 million ounces, according to the The Silver Institute’s annual World Silver Survey, which was produced by the GFMS team at Thomson Reuters. That was the lowest level since 2010.

“The sharp decline was attributed to the continual implementation of the anticorruption policy, which served a severe blow to the gifting sector, including bars,” according to the survey, which was released Wednesday.

A steep drop in silver prices certainly didn’t help. Silver futures SIN5, +0.79% on Comex fell nearly 20% last year, following a 36% plunge in 2013.

Total global demand for silver bullion bars fell 31% last year to 88.4 million ounces — in value, that’s about a $1.7 billion drop, the survey said.

Andrew Leyland, manager for precious metals demand at Thomson Reuters GFMS, told MarketWatch in an interview that he was surprised to see how weak demand from China actually was.

The government crackdown in gifting and its anticorruption campaign, along with a “softening of economic sentiment through the course of 2014,” impacted bar buying in China, he said. “A lot of luxury goods sectors didn’t have a particularly good year.”

Globally, investment in silver coins and bars fell by 20% last year to 196 million ounces, the survey said.

There was a slowdown in European buying of silver bars and coins, primarily due to an increase in sales tax in Germany that was applied to silver from the beginning of 2014, Leyland said.

He pointed out, however, that the market was coming from a record base year in 2013. Last year’s bar and coin investment figure was still the second highest on record.

And though the world’s silver mine production was up a 12th straight year in 2014 and supplies of the metal were at their highest in about 4 years, the market still saw a supply deficit of 4.9 million ounces last year.

Looking ahead, Leyland expects silver-mine supply to decline and is looking for growth in a number of demand sectors. He forecast an average silver price of $16.50 an ounce for this year.

Prices will see some short-term weakness, but are likely to end the year at more than $17 an ounce, with a couple of years of modest price increases to follow, he said.

Iron Ore Revival Puts Local Miners Back in the Black

Iron Ore Revival Puts Local Miners Back in the Black

At least least four Australian miners are cash-generative at current iron ore prices, thanks to a 23 per cent rise in the bulk commodity price over the past three weeks.

Another 5 per cent rally in the iron ore price late on Friday night capped a rare good week for the local industry, and pushed the benchmark price to $US57.81.

While BHP Billiton and Rio Tinto have easily remained profitable during the recent slump in iron ore prices, it is likely that few other local iron ore exporters were generating cash when the price hit $US47.08 on April 2.

But a weekly gain of 13 per cent means the iron ore price is now at six-week highs, and is believed to be above the "break-even" price for the world's fourth biggest producer, Fortescue Metals Group.

The estimation of break-even prices is fraught given the constantly changing factors involved, but Fortescue is believed to need iron ore prices to be about $US50 per tonne to cover its cost of production, royalties, maintenance spending and its debt obligations.

Fortescue mines at two locations in the Pilbara, with its newer Solomon hub the cheaper operation, while the company's original Chichester precinct is estimated by Deutsche to lose money at benchmark iron ore prices below $US50 per tonne.

The miner has already outlined plans to reduce its costs even further in the 2016 financial year, with a dramatic reduction in the amount of waste ore moved at the Chichester precinct set to drag break-even costs below $US45 per tonne.

The plan, in concert with last week's debt refinancing which pushed the company's next debt repayment back to 2019, should help Fortescue survive the lowest point for iron ore prices, which analysts at Deutsche and Credit Suisse expect to come in between the 2015 and 2017 calendar years.

But Deutsche analyst Paul Young recently opined that Fortescue's revised working plan in the Chichesters is not sustainable longer term, and is likely to be a viable approach for less than two years.

"The change in mine plan at the Chichesters is likely net present value destructive as it will likely shorten mine life and impact product quality," he said in a recent note.

The junior miner that relies on Fortescue to rail, ship and market its product to customers, BC Iron, is also likely to be profitable at the recently improved iron ore price.

According to BC's improved performance during the month of March, UBS believes the miner can be generating cash so long as the benchmark iron ore price is $US55 per tonne or higher.

Those close to break-even around these prices are believed to include Mt Gibson Iron, whose cost position has ironically improved since a wall failure at its Koolan Island mine, and US miner Cliffs Natural Resources, whose Koolyanobbing operation exports through the South Coast of WA.

US miner Cliffs Natural Resources will update investors on Wednesday morning Australian time when it publishes its March quarter results.

Gina Rinehart's Roy Hill project is not expected to start exporting until August or September, and is believed to have a break-even price between $US41 and $US51 per tonne.

Those needing a further improvement in prices include Arrium Limited and Atlas Iron, which ceased operating its mines just over two weeks ago.

While last week's improvement in iron ore prices has injected some hope into the local sector, the rising commodity price has come with some trade-offs.

The Australian dollar, which hurts local miners when it is high, has risen 3 per cent to US78.15¢ over the past two weeks.

Oil prices also appear to have found their bottom, prompting a slight rise in prices for some "bunker fuels", which are consumed by ships that carry commodities like iron ore.

Local miners will be hoping those factors don't continue rising and blunt the impact of improved iron ore prices.

Rio Tinto Goes Full Ore Ahead

Rio Tinto has revealed it shipped 72.5 million tonnes of iron ore from its Pilbara mines during the three months to March

CYCLONE season and a train derailment have slowed Rio Tinto’s iron ore business but the mining titan’s expansion plans remain firmly in place.

The Anglo-Australian miner has revealed it shipped 72.5 million tonnes of iron ore from its Pilbara mines during the three months to March.

The result, revealed in a production update on Tuesday, was 12 per cent lower than the previous quarter but 9 per cent higher than the same period a year earlier.

Rio produced 74.7 million tonnes of iron ore for the March quarter with the difference going into stockpiles.

Production was down 6 per cent on the previous quarter but up 12 per cent year-on-year.

The result missed market expectations but analysts were unfazed as Rio maintained its full-year production forecast at a record 350 million tonnes and said it would draw down on inventories to maximise cash flow throughout the year.

Rio said its operations had been impacted by tropical ­cyclone Olwyn, which battered the West Australian coast last month, and a train derailment that temporarily blocked ­access to Dampier port.

Smaller competitors such as Fortescue have been deeply critical of Rio and rival BHP Billiton for continuing to bring on new supply as the price of the key steelmaking ingredient tumbles.

Chief executive Sam Walsh said Rio’s push to milk as many low-cost tonnes from its iron ore business as possible was in the best interests of shareholders over the long term.

“By making best use of our high-quality assets, low cost base, and operating and commercial capability our aim is to protect our margins in the face of declining prices and maximise returns for shareholders throughout the cycle,” he said.

The price of iron ore rose 1.3 per cent to $US51.57 a tonne early on Tuesday after hitting a decade low of $US47.08 a tonne in early April.

Rio produced 144,000 tonnes of copper during the March quarter — a 9 per cent drop on the same time a year earlier due to mining lower grades.

Rio shares closed up 1.5 per cent on Tuesday at $55.50

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Atlas Iron Suspends Itself From Share Trade Amid Plunging Prices

Atlas Iron is stumbling in the face of the slumping ore price, suspending itself from the local share market as it tries to map out a future.

Iron ore slumped over the weekend to a fresh low of $US46.70 a tonne on a key Chinese spot market.
Atlas said it has been surprised by the "extent and the pace of the decline in the iron ore price" which it says has fallen 24 per cent since it released its half-year accounts in February.

"The voluntary suspension is requested pending the outcome of an extensive review of the company's operations, financial outlook, asset sale opportunities and capital structure," the company said in a statement to shareholders.

The company said it has already commenced discussions with a number of its stakeholders in relation to various initiatives it is undertaking to reduce costs and preserve value.
Bulk transporter McAleese Group is one of those stakeholders, it has a major iron ore haulage contract with Atlas worth around $250 million and not due to expire until 2017.

McAleese has issued a statement to shareholders saying it will continue to work with Atlas as a priority to "achieve sustainable solutions for both parties."

Atlas shares, which last traded at 12 cents, will remain suspended until the company makes an announcement at the end of the review, which should be in the next fortnight.

The share price has lost 88 per cent in the last 12 months.

Financial advisory and asset management firm Lazard is assisting Atlas with the review.

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South32 A Major in the Making - BHP Billiton

I am becoming more known these days for my gripes than my enthusiasms. A long held complaint (extant at least 7 years) has been at the denuding of the middle ranks of miners. If one looks at the mining market from a Darwinian perspective (and that is particularly apt in these days of survival of the fittest) the pyramid of life (and we use that word under advisement in the mining space) is extremely out of kilter. We have a handful of majors and vast plethora of juniors and a mid-tier that is severely underpopulated. 

This is not a natural situation. If one wonders why mining M&A is in such a torpor one not look much further than the lack of mid-tier companies for majors to munch upon. Just as a T-Rex would not have bothered chasing a squirrel (if they had even existed conterminously) thus mining majors cannot be bothered snuffling in the undergrowth of Vancouver or Perth to look for transactions that are canapés rather than main courses.

However, if we look at majors we have two ways in which they are created. One is by an existing historic major (BHP, Anglo-American, RTZ, Freeport-McMoran) devouring other smaller majors of mid-tier companies or by mid-tier companies bulking up through mergers with like-sized entities to catapult themselves into the top tier. 

Good examples of this are Barrick which went over decades, through a series of mergers from being nothing special to being a major (and still nothing special). Goldcorp, through its acquisitions of Glamis Gold and Wheaton River, is a better example of 1+1+1 equaling more than the sum of the parts. The mid-tier during the last decade and a half was not “restocked with names” because of the failure of Darwinian forces in the mining space.

Having bemoaned however the lack of the md-tier we might also bemoan the lack of majors. There has been a massive concentration in this group which has resulted in a situation where, back in the 1950s, one could have pointed to a score of diversified majors (many US-based) to a much depleted band these days. 

The survivors have gone beyond the categorization as majors and now are more accurately described as behemoths. There was a spooky moment late last year when the threatened takeover of RTZ by Glencore threatened to even reduce the ranks of the behemoths. Fortunately this proved to be just an attack of wind by Ivan Glasenberg.

Breaking up the Brontosaurs

There has been a spate of proposals in recent times to break up some of the biggest miners. BHP are spinning out South32, Vale are supposedly setting free the nickel (and other base metal) assets in a New INCO and Anglogold Ashanti went through gyrations last year first claiming it would spin out non-African assets and then doing an about-face. Chatter about RTZ disposing of diamonds or uranium interests, through demergers, surfaces from time to time.

Son of BHP

The Vale proposal is, I suspect, waiting to see how South32 goes (and also for a turn in the nickel price) while the Anglogold breakup is off the table (for now). However the South32 deal is very much alive and kicking, with a mid-May launch date.

BHP-Billiton is of course a behemoth with a heavy weighting towards iron ore, coal and oil & gas, but a plethora of other activities. Some bright spark has clearly persuaded the management that it should get rid of lesser activities (like being the largest manganese operations in the world and owning the largest silver mine) and instead focusing upon its three core commodities which all have a weak outlook at the moment. Perish the thought it might be the same type of investment bankers that thought Time Warner AOL might be a good combo! So this looks like a “taking candy from babies” opportunity for canny investors. Big dumb corporation throws baby out with bathwater and the opportunity is to try and catch the baby mid-air.

The spinout has been named South32 in a rather tenuous reference to the latitude upon which most of the major assets lie. Not really accurate, but in the annals of recent corporate namings it is one of the less obscure creations of the “branding arts”. The new entity will have operations in Australia, Brazil, Southern Africa and Colombia. The main assets will be:

GEMCO: largest Manganese ore producer
Cannington: largest silver producing mine (with lead and zinc)
Worsley Alumina: one of the largest alumina refineries
Hillside (aluminium smelter in South Africa), Mozal Aluminium (in Mozambique), Illawarra Metallurgical Coal, Cerro Matoso (nickel mine in Colombia), Alumar Refinery (aluminium in Brazil) and South Africa Energy Coal
Non-operated JV interests in Brazil (mainly a bauxite mine, refinery and smelter)

This makes for a very diversified company, by commodity and customer, with US$8.3bn of revenue in FY2014. The new company will be headquartered in Perth and will have listings on the ASX, JSE and LSE.

The new entity will be one of the major players in Manganese and aluminium; however as the chart below shows most of the revenue streams are rather well-balanced.

Interestingly the company is way less dependent upon China as a customer than many other majors.

Some have speculated that South32 might turn around and ditch the South African coal assets (to Mick Davis’sX2?). I would not shed a tear on that one. The opportunity then would come in bulking up the nickel part of the business, but more excitingly adding to the lead/zinc component to capitalize upon the Cannington position.

I am becoming more known these days for my gripes than my enthusiasms. A long held complaint (extant at least 7 years) has been at the denuding of the middle ranks of miners. If one looks at the mining market from a Darwinian perspective (and that is particularly apt in these days of survival of the fittest) the pyramid of life (and we use that word under advisement in the mining space) is extremely out of kilter. We have a handful of majors and vast plethora of juniors and a mid-tier that is severely underpopulated. 

This is not a natural situation. If one wonders why mining M&A is in such a torpor one not look much further than the lack of mid-tier companies for majors to munch upon. Just as a T-Rex would not have bothered chasing a squirrel (if they had even existed conterminously) thus mining majors cannot be bothered snuffling in the undergrowth of Vancouver or Perth to look for transactions that are canapés rather than main courses.

However, if we look at majors we have two ways in which they are created. One is by an existing historic major (BHP, Anglo-American, RTZ, Freeport-McMoran) devouring other smaller majors of mid-tier companies or by mid-tier companies bulking up through mergers with like-sized entities to catapult themselves into the top tier. 

Good examples of this are Barrick which went over decades, through a series of mergers from being nothing special to being a major (and still nothing special). Goldcorp, through its acquisitions of Glamis Gold and Wheaton River, is a better example of 1+1+1 equaling more than the sum of the parts. The mid-tier during the last decade and a half was not “restocked with names” because of the failure of Darwinian forces in the mining space.

Having bemoaned however the lack of the md-tier we might also bemoan the lack of majors. There has been a massive concentration in this group which has resulted in a situation where, back in the 1950s, one could have pointed to a score of diversified majors (many US-based) to a much depleted band these days. The survivors have gone beyond the categorization as majors and now are more accurately described as behemoths. There was a spooky moment late last year when the threatened takeover of RTZ by Glencore threatened to even reduce the ranks of the behemoths. Fortunately this proved to be just an attack of wind by Ivan Glasenberg.

Back in the early 1980s the first stock I ever bought was a very tiny amount of BHP (as it then was) and made a good turn on it. The price was embarrassingly low compared to where the stock stands now but the early 1980s were a grim period for most miners. The first time I have even been tempted to buy BHP since then is now… and strangely it’s so I can sell it… after having stripped out the South32 spin-out as a “keeper”.

Approval for the Demerger is being sought at shareholder meetings to be held in Perth and London on the 6th of May 2015. Under the spin-out proposal eligible shareholders would retain their existing shareholding in BHP Billiton and also receive a new share in South32 for every BHP Billiton share held (at the applicable record date which I understand to be mid-May). After that date South32 will be able to be kept and the BHP Billiton ditched with alacrity.

Perversely this opportunity (probably much to the chagrin of BHP’s execs) reminds me of Morticia Addams chopping the heads off roses to keep the thorny stem.

In the minds of the big strategists in the corporate suite of BHP, the “big metals” are the ones to keep. I would rather grasp the thorny stem any day….

Metal Prices Aid Glencore’s Chances with Rio Tinto

The biggest, most complex mining deal ever broached could boil down to a simple ratio: the price of copper versus the price of iron ore.

Glencore PLC, the Swiss mining giant with massive copper holdings, last year proposed a roughly $US150 billion merger with Rio Tinto PLC, among the world’s biggest producers of iron ore. Glencore’s announcement that Rio rebuffed the bid on October 7 set off a six-month moratorium under UK law from another approach.

That cooling-off period ends tomorrow, potentially opening the door to more talks. The two miners had never publicly disclosed potential terms, and Rio (RIO) executives haven’t encouraged new talks.

But two factors have swung in Glencore’s favour that could encourage a deal creating the world’s largest mining company and give investors exposure to every major commodity.

Glencore’s shares are up more than 15 per cent since mid-January, when they briefly hit their lowest level since the company went public in 2011 amid a decline in copper prices, while Rio’s have dipped 3 per cent.

A big reason for the divergence: Ironore prices have continued their long decline from highs of $US190 a tonne reached in 2011, recently hitting a 10-year low below $US50 a tonne. Copper prices, meanwhile, have rebounded by about 5 per cent to just north of $US6,000 a tonne in the past month.

Industry experts also don’t expect to see a recovery in the price of iron ore, a primary steelmaking ingredient, anytime soon. Caroline Bain, senior commodities economist at Capital Economics Ltd. in London, last month forecast that iron-ore prices are likely to hit $US45 a tonne by year-end as large surpluses of iron-ore continue to flood into the market and Chinese demand cools.

Such declines have been driven by unrelenting increase in iron ore production from Rio Tinto and its competitors such as BHP Billiton Ltd. and Vale SA. If production isn’t curbed, prices could continue to fall, analysts say.

“Sooner or later either (Rio is) going to have to back away from the volume-growth strategy, or they’re going to have to face the prospect that their earnings are going to fall through the floor,” said Sanford C. Bernstein mining analyst Paul Gait. If Rio’s earnings keep falling and its share price suffers, “they’re going to be vulnerable to Glencore, “ he said.

Rio Tinto chief executive Sam Walsh has repeatedly said he isn’t interested in a deal with Glencore. At a February event in London, Mr Walsh said bluntly the merger “isn’t going to happen,” indicating he thought Glencore couldn’t pay a high-enough price.

Glencore’s shares have lost about one-fourth of their value since last July, when its chief executive, Ivan Glasenberg, placed a call to Rio Tinto Chairman Jan du Plessis to discuss a potential merger. Since Glencore would need to offer shares as part of the deal, the math has become significantly more daunting for Mr Glasenberg.

Glencore also is heavily exposed to the price of coal, which has stumbled for similar reasons to iron ore. Plus, any deal would face strict scrutiny from antitrust authorities in the UK and Australia, where Rio Tinto is based.

One of Glencore’s main hurdles in executing a Rio Tinto deal is its debt-heavy balance sheet. Glencore had $US30.5 billion in net debt at the end of 2014, compared with Rio’s $US12.5 billion in debt. That puts Glencore’s leverage ratio — net debt divided by the sum of debt and total equity — at about 40 per cent, roughly twice the leverage at Rio Tinto.

That could put a cap on how much more debt Glencore can take on to fund a Rio bid. More debt could threaten its credit ratings, putting pressure on its trading arm, which relies on leverage to fuel its operations.

In Glencore’s favour are rebounding copper prices, which could help push its share price higher. Mr Gait of Sanford C. Bernstein expects copper and other factors to help lift Glencore’s share price to nearly double where it currently stands.

Perhaps the biggest wildcard is China. China’s state-owned aluminium company, Chinalco, is Rio Tinto’s biggest shareholder. It has seen the value of its 9.8 per cent stake in the company cut roughly in half since it made the investment in 2008. Rio in 2009 rebuffed a bid by Chinalco to double its stake, which would have given it a seat on Rio’s board.

Those factors have brewed tensions with Chinalco, potentially leaving Beijing open to new leadership at Rio Tinto, said Michael Komesaroff, a long-time analyst of China and natural-resource trends.

A person who picked up the phone at Chinalco’s Beijing office said nobody was available for comment over the weekend, which was also a holiday in China.

Glencore in its 2013 merger with Xstrata proved it could bargain with the Chinese, getting Beijing’s approval for the deal in part by agreeing to sell its Las Bambas Peruvian copper project to a Chinese consortium.

China, the world’s biggest consumer of copper, is unlikely to have lost its appetite for ownership of copper mines, analysts say. One option for Glencore would be to offer to sell one of Rio’s prized copper mining assets, such as its 30 per cent stake in Chile’s Escondida mine.

“If the Chinese want to make it happen, it’s more than likely going to happen,” said Mr Komesaroff said.

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