Week-in-Review: Mining Mergers and Divestitures Get Complicated

by Jeff Yoders on FEBRUARY 19, 2016

This week we learned that Anglo American PLC is divesting itself of all of its coal and iron ore mining assets and having a major fire sale of other properties, too.

My esteemed colleague, Stuart Burns, wondered if the South African miner would be able to find suitors for so many mining properties.

“If Anglo will find buyers for its iron ore and coal assets in today’s market remains to be seen,” he wrote.

Yet, Anglo already has one suitor. Not for its low-priced coal and iron ore assets, but for its Manganese mines in South Africa’s Kalahari Basin. Manganese phosphate is often used as a treatment for rust and corrosion prevention in steel and its often mined with iron ore as the two show up together in rock formations frequently.

Victim of Divestment Wants to Buy Divested Assets

Who is this mystery suitor, you ask? South32, itself a recently demerged portion of that other mining giant, BHP Billiton.

South32 essentially comprises BHP’s unwanted assets. Its share price has tumbled in line with BHP’s but whether the market will view it, long term, as having equivalent value remains to be seen.

“There was a reason presumably why BHP spun it off and that was supposedly that the assets in South32 are going to need a lot if capital for a long time,” my colleague, Stuart, adds.

So, BHP demerged its assets and the resulting spinoff, South32, is now buying assets that Anglo American is looking to divest itself of? How meta is that? Very. South32 is actually made up, mostly, of resources owned by Billiton before it even merged with the Broken Hill Property Group (BHP) in 2001… the merger that created BHP Billiton. So it’s a spinoff of a merger now possibly acquiring unwanted assets being discarded by another recently diversified big miner.

The only thing that still needs to happen is the newly merged South32 and Anglo American unit to grow powerful enough to buy both BHP Billiton and Anglo American, SBC-buys-AT&T style. As Forbes’ Tim Treadgold writes, breaking up is actually relatively easy to do. It’s merging that’s hard.  Let’s see how the gathering of all these remaining pieces goes.

Mining Mergers: Niobium on the Block

It’s not just manganese that South32 wants, either. Bloomberg is reporting that South32 is also eyeing Anglo American’s niobium and phosphate business in Brazil. Niobium is used to strengthen steel and Anglo is the second-largest producer in the world of the coveted ore behind market leader CBMM, which sits on a huge Brazilian deposit of the stuff. With Manganese and niobium mining operations secured, South32 could be a potent steel additive supplier.

Anglo American wants out of the iron ore business and BHP, seemingly, is looking to limit its exposure to the commodity’s low prices, too. It looks like South32 wants to fill the gap created by the breakup of the giants.

Executive Forced Out Via Merger Bids on Distressed Assets

Remember when I said it couldn’t get more meta? I was wrong. Most investors in BHP Billiton are expected to hold onto their new South32 stock to see how it performs and whether it attracts yet another takeover bid which could come from X2 Resources, the comeback vehicle of former Xstrata chief executive Mick Davis. Yes, X2 is Davis’ new company, constructed after Glencore‘s Ivan Glasenberg essentially won the merger battle between the two then-rivals in 2013. Yet, today, Glencore is saddled with debt from the merger and Davis and X2 are sitting relatively pretty and ready to swoop in and buy low-priced assets. Davis and X2 are said to be the only suitor for Rio Tinto‘s underperforming coal assets. Who’s laughing now, Ivan?

It seems like only a matter of time until Rio Tinto commits fully to the type of downsizing that BHP, Glencore and now Anglo American are now committed to. X2 and South32 will likely be the suitors for mines whose products are still fetching market prices far too low to draw outside interest.

When prices finally do climb back up, will we see another merry-go-round of mergers and diversifications? It all depends on how far back these executives’ memories stretch and if the market price really looks good enough to risk going right back to product diversification square one.

Source: MetalMiner