More firms now take on political risk
Lauren Bitter
668 words
29 May 2008
The Star
e1
7
English
© Copyright 2008 Independent Newspapers (UK) Limited. All rights
reserved.
For the past few years, the metals and mining industry has witnessed a
flurry of mergers and acquisitions (M&A), totalling about $210.8
billion (R1.5 trillion) last year, as companies found it easier to buy
a running operation than start from scratch.
High metals prices have served as a great incentive for M&A activity,
as key raw materials such as copper, aluminium and nickel have rallied
to record highs.
Experts believe the M&A trend is likely to continue, although at a
slower pace, but scarce metal reserves in the earth's crust will force
firms to go where the assets are.
"Increasingly we are going to more remote areas, first to explore and
then develop projects," said Rio Tinto. "The reality is you have to go
a bit further afield these days to find new, good quality
mineralisation. The traditional areas have been explored."
That is exactly what Rio did when it teamed up with Canadian
exploration company Ivanhoe to develop the colossal gold and copper Oyu
Tolgoi deposit in Mongolia.
There have been repeated delays in Mongolian legislation to approve the
$13 billion project, which has pushed up costs, causing Ivanhoe to lose
money in the third quarter of last year.
But companies had not become discouraged by increased political risks,
as they had become much more adept at handling them, said a senior
industry expert.
Michael Lynch-Bell, a global mining and metals transaction leader at
Ernst & Young, said: "Firms are finding political risk easier to deal
with."
Anywhere in the world
Almost half of the participants in last year's survey by Ernst & Young
say there are no regions in the world that they will avoid.
"They have to take the risk," said Simon Gardner-Bond, a mining analyst
at Ocean Equities. "Because there are no deposits elsewhere for them,
it is the lack of supply that's driving people to go to the higher
sovereign risk areas."
Countries such as the Democratic Republic of Congo, Mozambique,
Kirgizistan and Tajikistan have recently entered the spotlight, thanks
to their mineral-rich deposits.
In the case of larger mining companies, setting up a joint venture or
buying a minority stake in the project looks more convenient than
owning the whole deposit.
"Due to political and safety issues, there are certain places you would
avoid, but you also have to monitor these areas," said Illtud Harri,
the spokesperson for the world's largest mining company, BHP Billiton.
Harri said bringing in partners was a good way of getting involved.
BHP Billiton did exactly that in war-torn Mozambique, by setting up an
aluminium smelter.
In some cases, majors prefer to act together in risky areas. BHP
Billiton, Anglo American and Xstrata operate a big coal mine in
Colombia that faces security risks.
On Tuesday a coal train from the Cerrejon coal mine, owned by the three
mining companies, was derailed by a guerrilla bomb attack.
David Rovig, the president of Greystar Resources, a Canadian mining
firm with a big gold and silver project in Colombia, said security
risks were still an issue, but the situation had improved
significantly, compared with five years ago.
"A lot of the easy stuff is gone,'' said Rovig. ''You're forced to look
where the minerals are."
In an environment of rising inflation and transportation costs, small
mining companies bold enough to take on the initial risks may hope to
be taken over by a major company.
Such firms "don't have enough resources to develop the mine and related
infrastructure, and their access to debt and equity funding is harder",
said Paul Knight, a joint global chief of metals and mining at UBS.
This scenario could open the door to more M&A activity. "In M&A, you do
a transaction now, and a year later you've got an operating mine – the
reward is much bigger," said Knight.
