By Jason Simpkins
As BHP Billiton (BHP) continues its pursuit of the white whale known as Rio Tinto PLC (RTP), the world's second largest miner is expanding its own iron ore operations to better accommodate the rapid industrial growth of China and India.
With demand booming and prices soaring, iron ore has become one of the hottest commodities on the market. Contract prices for the metal have tripled in the past five years and could be up another 50% by the end of 2008. Anglo American PLC (AAUK) has responded by selling off gold, steel and paper assets and expanding in copper and iron ore.
Yesterday (Thursday), reports from local newspapers O Estado de Sao Paulo and Valor Economico revealed that Anglo is looking to acquire a sizeable stake in Brazilian mining and metals company MMX Mineracao e Metalicos. Anglo is negotiating with entrepreneur Eike Batista, who is the company's controlling shareholder.
Bloomberg News reported that a new company, in which Batista currently has a 64% stake, will be spun off of MMX and acquired by Anglo for $361.25 per share. The total amount to be paid by Anglo American is estimated to be $5.5 billion.
Last April, Anglo paid $1.15 billion for a 49% stake in MMX's Sistema Minas-Rio mine. The mine is expected to produce 26.6 million metric tons of iron ore by 2011. An initial output of 8 million tons is expected by the fourth quarter of 2009. Anglo also owns 65% of Kumba Iron Ore Ltd., Africa's largest iron ore producer.
Anglo is struggling to keep pace with BHP Billiton, the world's largest miner, which made its move to shore up its iron ore reserves by approaching Rio Tinto with a takeover offer.
While Rio Chief Executive Officer BHP is widely expected to make another proposal before its Feb. 6 deadline.rejected BHP's initial $127 billion offer, saying it "significantly undervalued Rio Tinto and its prospects,"
Rio has repeatedly attempted to ward off BHP's overtures, and announced Wednesday that it achieved new records for iron ore, alumina, aluminum, bauxite, gold and copper in 2007. The company said it produced 145 million tons of iron ore last year, a 9% increase over 2006.
Tim Gerrard, an analyst at Austock, told the Independent, that the mining industry's "super-cycle" of sustained high prices will continue.
"There is a case to be argued that Rio's iron ore assets may be valued, within three to four years, at the entire market capitalization of the company," he said.
Currently, the contract price at which most iron ore is sold is $85 to $90 a ton, less than half the current spot price of $190 a ton, but the contract price is expected to rise substantially this year.
As the world's biggest iron ore miner, Vale (RIO), takes the lead in negotiations. While its precise stance this year remains unclear, some analysts believe the company could drive the benchmark price 70% higher.
News and Related Story Links:
Anglo May Pay $5.5 Billion for MMX Iron-Ore Assets
Anglo American reportedly to acquire stake in Brazil miner MMX
- Money Morning:
BHP Readying Another Rio Bid