Fine lines in a mining world redistribution

The big miners are looking to sell and many mid-sized operators need to expand. But as with Northparkes, commodity price concerns and ad hoc Chinese buyers will complicate the equation.

It is a neat, if confusing, coincidence that on the day that Rio Tinto announced it had sold its interest in the Northparkes copper-gold mine to China Molybdenum, Oz Minerals announced a $200-$240 million writedown of the value of its Prominent Hill mine.

Oz Minerals had been consistently touted as one of the frontrunners to acquire Northparkes, partly because it has the financial capacity, with no debt and nearly $700 million of cash at the end of the first half of this financial year, and partly because Northparkes would have filled in the gap between the decline of production from Prominent Hill and the ramping up of its Carapateena project.

Despite the foreshadowed writedown, which is non-cash, Oz Minerals could have very comfortably financed an acquisition of Northparkes. That would suggest that it wasn’t prepared to pay the price of success. Oz Minerals has been very disciplined in not using its cash hoard and unleveraged balance sheet to overpay for assets.

China Molybdenum has agreed to pay $US820 million ($884 million) for Rio’s 80 per cent interest in Northparkes. The remaining 20 per cent is held by Japan’s Sumitomo group, which has pre-emptive rights over Rio’s interest and has previously indicated it would be keen to significantly increase its exposure to copper.

The Northparkes sale is part of a Rio asset sales program that has yet to get properly underway. While it sold the Eagle nickel and copper project in the US for $US325 million last month, an attempt to sell its diamonds business was halted when it failed to attract bids acceptable to Rio chief executive Sam Walsh. Rio is also still trying to devise a way of selling or separating the least attractive assets within its portfolio of aluminium operations.

Rio, of course, isn’t alone. Most of the major miners, including BHP Billiton, have stated their desire to rationalise portfolios that grew significantly during the commodities boom and retreat to a core of their highest-quality projects. There will be plenty of opportunities for the mid-sized Oz Minerals of the mining world.

With commodity prices down substantially from their peaks and some quite gloomy assessment of the near to medium term outlook, however, it will be difficult for the vendors to maximise the prices they receive and for buyers to avoid overpaying.

Oz Minerals’ writedown to Prominent Hill was driven by accounting standards, which triggered the need for an impairment test when the market capitalisation of the company fell below the carrying value of its assets in its balance sheet.

Oz Minerals said the anticipated impairment was due to lower than expected prices for copper and gold, particularly in the near term, offset to some degree by the lower Australian dollar. In 2008, when commodity prices tumbled because of the financial crisis, the company took a $251 million impairment charge against Prominent Hill which was reversed 18 months later as prices recovered.

While copper has until recently been regarded as the one commodity where the price was underpinned by the fundamentals of demand and supply, that view has shifted as China’s slower growth and the new leadership’s goal of changing the composition of that growth has been increasingly factored in.

The copper price has fallen about 15 per cent this year as China’s slowing has become evident and the price, which nearly reached $US8000 a tonne last year, is now expected to be below $US7000 a tonne over the next few years. Like most commodities, there is an expectation that the market will be in oversupply.

The gold price has, of course, plummeted since late last year, from around $US1750 an ounce to around $US1300 in a demonstration of its sensitivity to the outlook for the US economy and US interest rates. Speculation of a "tapering" of the US Federal Reserve Board’s quantitative easing program, and some movement up in market rates, was enough to trigger a frantic unwinding of exposures to gold and a large-scale dumping of positions by exchange-traded funds.

If the subdued outlook for commodities and, in this instance, for copper and gold in particular is borne out, Rio has probably negotiated a pretty good price for its Northparkes mine. It has been speculated that it wanted $US800 million and it has got more than that in a difficult environment.

It helps that, despite the general slump in commodity prices, there are still Chinese buyers around looking to get their feet on resource assets. Northparkes is generally regarded as a good asset, albeit not one big enough to have a meaningful impact within the Rio portfolio.

Rio, BHP and others are going to need more Chinese buyers and some cashed-up medium-sized miners like Oz Minerals if they are to cleanse their sprawling portfolios of underperforming or sub-scale assets.

To get attractive prices, they’ll also need prospective buyers that are somewhat more optimistic about the outlook for commodity prices than the market-at-large.