Merger's The Word At Miners' Do

Sydney Morning Herald

Monday August 7, 2006

Jamie Freed

A RECENT wave of industry consolidation is sure to be a hot topic when the annual Diggers and Dealers mining conference kicks off in Kalgoorlie this morning.

Appropriately, among those addressing the 1400-plus delegates will be Don Lindsay, chief executive officer of Canadian base-metals major Teck Cominco, which is battling US copper miner Phelps Dodge in a multi-billion dollar battle over Canadian nickel miner Inco.

Due to the rapid rise in the costs of the fuel, labour and equipment needed to build large mining projects, at the bigger end of the spectrum many companies are finding it cheaper to buy rivals rather than build new mines.

In light of its apparent win in the bidding war over Canadian nickel and copper miner Falconbridge, Anglo-Swiss minerals house Xstrata is among the more active buyers in the market.

After releasing record half-year results last week, Xstrata chief executive Mick Davis said there was no "universal answer" to the question of whether to build or to buy. "It just depends," he said.

Xstrata is not scheduled to make a presentation at this week's conference but its name is likely to come up in conversation due to its history of rapid growth through acquisitions.

In contrast with Xstrata, Rio Tinto went out of its way to promote its organic growth pipeline after producing record-half year earnings last week.

That may have been a defensive move, in light of a Citigroup report in June which noted that BHP Billiton and Xstrata offered more possibility for growth than Rio and Anglo American. Anglo is restructuring and on Friday announced plans to return $US5 billion ($6.6 billion) to shareholders, although it insisted it retained enough firepower to make acquisitions.

There has been plenty of speculation that Rio could soon make a large acquisition by bidding for either Inco or a North American aluminium miner like Alcan or Alcoa to help balance its portfolio. "As Rio has grown its iron ore production base, it has moved from being a more diversified company to being an iron ore company with copper leverage," Merrill Lynch analyst Vicky Binns noted.

Rio executives last week seemed comfortable with the company's current commodity balance and growth options but noted it maintained the capability to purchase assets. "Whether [assets] are cheaper to build or to buy depends on the cost structure of the particular business you are looking at," Rio chief executive Leigh Clifford said.

Potential targets are definitely aware they could be vulnerable to a takeover.

In an interview with Canada's Financial Post last week, Alcan chief executive Dick Evans refused to answer a question about whether Rio or BHP had approached the company to strike a merger deal. "Asking is not going to get you an answer," he told the reporter.

Mr Evans then added that investment banks were always pitching deals to his company and to others. "During the rumours [of a possible bid for Alcan sparked by a report in the Herald in May], before the rumours, after the rumours," he said. "That's what they do, right?"

In an industry rife with merger activity, it's worth noting that plenty of investment bankers will be in Kalgoorlie this week, scouting for opportunities.

© 2006 Sydney Morning Herald

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