Study Group: Gold Mining Experts (Canada)

GLG News^SM Analyses by this Study Group's Leading Experts(?)

Rio Tinto Stock Price Woes Tied to Debt-Financed Acquisition of Alcan

December 8, 2008

Analysis by:Hugh Burns, Affiliate Faculty,

Analysis of:The Going Gets Rougher: Rio Tinto Crashes to Six Year Lows | www.moneyweb.co.za

 High leverage and mining companies are not good bedfellows, and Rio Tinto’s dramatic decline in its stock price is a testament to this.  During the bull markets in mineral commodity prices over the last few years, most mining companies used at least some of the cash surplus generated from higher prices and increased cash flows from operations to reduce debt.  Rio Tinto acquired Alcan in 2007 primarily with the proceeds from a $40 billion syndicated acquisition facility creating what is for a mining company a highly- leveraged balance sheet (gearing ratio of 60+%).  $33 billion of this facility was still outstanding at June 30, 2008 when the Company reported its half-year results for 2008, and management stated that the debt would be paid off in short order through the disposition of some of Alcan’s acquired subsidiaries and through cash flows from operations. 

Barrick Gold’s M&A Strategy Makes Sense

December 5, 2008

Analysis by:Hugh Burns, Affiliate Faculty,

Analysis of:Barrick Gold looking at M&A, sees cheap assets | www.reuters.com

The Mining Industry experienced a flurry of consolidation during the last several years of high mineral commodity prices as companies were flush with cash and credit was easy to come by.  However, this consolidation fever ignored the age old adage “buy low and sell high.” Now that mineral commodity markets are in a major slump, many acquisition targets can be obtained at bargain prices.  Barrick Gold’s (ABX: TO and NYSE) strategy to cautiously pursue acquisitions now makes sense in the long run, especially since the Company enters into this downturn with a strong balance sheet.

Freeport-McMoran Announcement to Reduce Moly Production and Curtail Expansion Projects Shows the Cyclical Nature of the Mining Industry is Alive and Well.

November 14, 2008

Analysis by:Hugh Burns, Affiliate Faculty,

Analysis of:Freeport-McMoran Copper & Gold Inc. Announces Molybdenum Production Curtailment and Plans to Defer Restart of Climax Molybdenum Mine | www.fcx.com

Reduced production output, postponed or cancelled capital and exploration expenditures, closure of marginal mine sites and impairment charges are common scenarios in mining companies during bear markets in mineral commodities.  The recent announcement by Freeport-McMoran (NYSE:FCX) that it intends to reduce production at its Henderson primary molybdenum mine and to curtain construction to restart its Climax primary molybdenum mine are symptomatic of the recent dramatic decline in molybdenum prices.  Stakeholders would be wise to expect additional similar developments among various players across the Mining Industry as the worldwide economic slowdown is pushing down mineral commodity prices.  

Merger of Katanga and Nikanor to Create Value by Unlocking Synergies of Adjacent Properties

November 8, 2007

Analysis by:Hugh Burns, Affiliate Faculty,

Analysis of:U.K. Mining Firm Katanga to Buy Nikanor for $2.1 Billion | online.wsj.com

It is refreshing to see a merger of mining companies that will truly create added value through synergies in contrast to many mergers that appear to be not much more than empire-building exercises.  The merger of Katanga Mining Limited and Nikanor PLC will result in the consolidation and integration of two very promising mining properties in the Democratic Republic of Congo.  The properties are adjacent to each other so significant operational synergies can be achieved by combining operations.  These synergies are expected to include capital savings, lower unit operating costs and increased production.  The newly combined operation is expected to produce annual output of approximately 400,000 tonnes of copper and 40,000 tons of cobalt, making it a truly world-class operation. 

Harmony Gold's Accident Threatens Industry's Social License to Operate

October 8, 2007

Analysis by:Hugh Burns, Affiliate Faculty,

Analysis of:Mine Mishaps Raise Questions on Safety | online.wsj.com

Harmony Gold’s recent accident that trapped 3,200 gold miners for a day or more points to the increasingly sensitive "social license" the Gold Mining Industry has to operate in various countries around the world. This license is only granted to if they are perceived to be responsible citizens and to contribute to, rather than detract from, the social welfare of local and regional communities. Once a company loses its social license to operate in a particular country because of negative publicity stemming from catastrophic events like accidents, environmental contamination, etc., it can be very difficult, if not impossible, to recover and continue profitable operations. Local reaction can include government intervention and investigations causing production cessation, strikes and labor unrest, local community demonstrations, etc. Nothing can damage a mining company's good will in a community like a major accident that threatens or takes the lives of many workers.

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