What's causing the spate of acquisitions, mergers and takeover bids in the world diamond mining industry?

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What's causing the spate of acquisitions, mergers and takeover bids in the world diamond mining industry?

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What's causing the spate of acquisitions, mergers and takeover bids in the world diamond mining industry?

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0 תגובות יום ראשון, 28/9/08, 10:13

Mergers and Acquisitions in the World Diamond Industry
04.09.08 / Mining

Project Suspensions

Mergers and Acquisitions of Diamond Mining Companies

The Big Merger: Will BHP Acquire Rio Tinto?

The world diamond industry is not immune to global economic turbulence. The fears regarding the future of the US economy and other Western markets have hindered consumption and exacerbated the status of small and medium-sized diamond mining companies.

This is the main reason why many companies are finding it problematic to finance new exploration projects and are seeking solutions. Two phenomena that stem from this situation are mergers between small and medium-sized diamond exploration companies as well as the acquisition of small diamond mining companies by larger ones which are capable of recruiting investors who believe in their ability to develop complex projects even in today’s challenging economic environment.

Project Suspensions

Diamond exploration companies are thinking twice before entering into high-cost, complex projects. This month Amazon Mining announced that it would cease the diamond development project at Terra Branca in Brazil due to what it called “adverse market conditions,” which prevented the signing of a joint venture. The company decided not to exercise its option to acquire the diamond project and ceased ongoing payments because the weak market impeded the search for a partner.

Recently, another two diamond mining giants temporarily pulled out of projects which were just about to begin. In Botswana, a conflict erupted between De Beers and African Diamonds due to De Beers’ insistence that the joint venture project at the AK6 diamond mine be postponed on the premise that electrical supply disruptions to the area would cause problems at the site. African Diamonds opposes any change in the original schedule which stipulated that the project was to commence production by the end of 2009. Legal proceedings have already been launched between the two parties.

The Trans Hex diamond mining company also pulled out of a joint diamond exploration project with KCM in South Africa’s Northern Cape. KCM expressed its disappointment, particularly due to its belief that the kimberlite at the site was more promising than other projects developed in the vicinity. Trans Hex’s experts were more skeptical about the project’s potential, and the company stated that it fails to meet Trans Hex’s criteria for investing in new diamond mining projects.

Mergers and Acquisitions of Diamond Mining Companies

The economic slowdown has lead to a spate of mergers and acquisitions of small diamond mining companies by larger ones.

In January 2007, Stornoway and Ashton merged after a takeover attempt by the former, which initiated the bid. At the same time, it acquired Contact and created a strong group focused on diamond exploration. Pangea DiamondFields (PDF) also attempted to acquire a 40% stake in Lesotho Diamond Corp (LDC), but its offer was turned down in May, 2007.

In a step that triggered a wave of mergers and acquisitions, De Beers decided to sell off some of its assets in June 2007. This decision caused an almost immediate spate of mergers among small diamond mining companies: Mwana proposed the acquisition of Southern Era, and Gem Diamonds acquired BDI. About a month later, Gem reached an agreement regarding the acquisition of the Australian Kimberley Company. In July 2007, the Canadian diamond explorer Vaaldiam purchased Elkedra and in March it acquired Great Western Diamonds, making it the leading diamond explorer in Brazil and one of the most significant players in Canada’s diamond mining industry.

In November 2007, Petra set up a new consortium called PDCC, which included the Saudi Arabian Investment Company Al Rajhi Holdings and the mining investment company Thembinkosi Mining. Within a period of several months, the company acquired De Beers’ famous Cullinan diamond mine as well as the Dancarl and Koffiefontein diamond mines, and the underground Kimberley diamond mine.

Other mergers were proposed: In August 2007, BRC Diamond merged with Diamond Core Resources of South Africa and formed a new company called BRC DiamondCore. In March of this year, merger talks between Xstrata, a diversified miner, and Vale do Rio Doce, a Brazilian mining company, failed. At the same time, Rockwell announced that it had acquired a 74% stake in VWDG, which owned the mining rights for three alluvial projects in South Africa’s Northern Cape.

The trend continued two months ago when West African Diamonds confirmed that it had been approached by a third party which informed the company that a takeover move was in the cards. In all probability, the significant trend of mergers and acquisitions is nowhere near stopping, in light of the fact that the global economic crisis remains unresolved. The volume of financing required by companies for seeking and testing potential mining sites is huge, and this does not ensure the discovery of a mine that is economically viable – finding such funding during economically shaky times is indeed a major challenge. In addition, beneficiation, which exists in both Africa and Canada, compels diamond mining companies to allocate 10% of the recovered diamonds to local industry, and in some cases the companies also help to set up local manufacturing plants.

The scenario which has been developing in recent years seems to indicate that if the current economic climate continues, smaller mining companies will cease to exist, and most of the diamond mining activity will be left in the hands of medium-sized and large diamond mining companies.

The Big Merger: Will BHP Acquire Rio Tinto?

During the past year, the industry has dealt quite extensively with giant miner Bio Billiton’s attempt to take over its greatest competitor, Rio Tinto. In November 2007, BHP offered Rio Tinto $138 billion in order to establish a mining giant worth $380 billion, but the bid was rejected.

In February of this year, BHP upped its bid to $147.4 billion, but was again turned down flat by Rio Tinto. BHP’s current bid, which stands at about $175 billion, has received the green light from the US Federal Trade Commission. Nevertheless, Rio Tinto hasn’t budged in its opposition to becoming part of the world’s largest mining conglomerate. The bid has yet to be approved by the regulators of the EU, South Africa, Australia and Canada. The European Commission announced that it intends to conduct an in-depth investigation into the bid due to fears that it will eliminate competition and raise commodity prices. A decision in the matter is not expected before the end of this year or the beginning of 2009. The Australian regulator also requested more information from BHP prior to reaching a decision in the matter.

There is no lack of opposition to the deal: Chinese and Japanese customers of both companies, steel manufacturers, and German industrial players are urging the European Commission to nix the bid. A short time ago, BHP announced a 15% increase in its profits and the company’s CEO Marius Kloppers stated that his company was as determined as ever to push the bid through. Analysts believe that BHP will take advantage of its profits to sweeten the deal for Rio Tinto, and that the EC will probably impose restrictions on the deal.

However, Rio Tinto also posted robust figures for the first half of 2008. It would appear that Rio’s promising results will serve to boost the company’s demands. Rio Tinto’s chairman Paul Skinner already stated that the financial results indicate that Rio is a “very strong stand-alone value proposition for shareholders."

If the takeover bid becomes a reality, the combined mining company will become one of the largest global conglomerates – even bigger than General Electric, AT&T or Microsoft. Aside from the establishment of a huge group, this would be the apex of acquisitions and mergers in the diamond industry in recent years, which stems from a highly challenging economic environment with which the mining companies are forced to deal. Any such merger between the two giants would cause far-reaching repercussions for the entire industry, and anyone connected to the diamond world will undoubtedly follow developments in this matter very closely.

By: Uri Haviv and Rachel Lieberman

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