With mining continuing to be one of the worst performing sectors, it is interesting to see the major players put more assets on the block. Strategically this makes sense, as it boosts the balance sheet and makes their business more focused on the best-quality projects. Yet there seems to be a growing risk that there are no cash buyers for these projects.
Rio Tinto (RIO) has reportedly hired Deutsche Bank to sell its share in two Australia thermal coal mines potentially worth several billion dollars. BHP Billiton (BLT) is also disposing of assets and Glencore (GLEN) is expected to streamline its business once the Xstrata (XTA) deal completes.
All the big miners are sellers of projects. It is hard to see them buying assets from each other in the present environment. The juniors are not buyers as they are struggling to raise finance for existing operations. While the mid caps may have aspirations to cherry pick assets from their bigger peers, finance is also a big hurdle to clear.
Asian and Middle Eastern investors – particularly state-backed funds – were assumed to be natural buyers of mining assets, but even their activity is becoming less pronounced in the mining sector. So does that leave private equity as the logical saviour?
Last December's Mines & Money conference in London featured numerous people who predicted that private equity would finally participate in mining, having only dabbled in deals until now.
You could argue that the depressed state of the mining industry makes it an ideal time for a private equity firm to pull together numerous assets and create a new mining powerhouse to rival the likes of BHP and Rio in the future. But will private equity take the risk?
There is also the question of valuation. Even though mining shares are depressed, valuations are not necessarily in bargain territory – particularly the diversified miners. They don't need to hold fire sales to get rid of assets because balance sheets are much stronger now compared to the 2008 global economic downturn. Hasty decisions were to blame for the industry's over-ambitious acquisition spree over the past decade. Management are now taking a more considered approach to everything they do; and that includes justifying why an asset should actually be sold.
So where are we in the current state of affairs? Rio Tinto is understood to be offering up to 29% of its Coal & Allied Industries unit. This owns several coal mines in New South Wales. Rio is also seen to be touting its holding in the Clermont and Blair Athol mines in Queensland state.
'Discovered accidentally by companies exploring for gold in the late 1970s, Clermont is one of Rio’s newest coal operations, opening in 2010, whilst after three decades of production, the Blair Athol operation closed November last year following a review deciding to not extend its mine life,' says stockbroker Numis.
Rio is also seen to be marketing its 58.7% stake in the Iron Ore Company of Canada for an estimated $1.7 billion. Its diamonds business has been 'under review' – i.e. for sale – for some time but there has been no news on any interested parties. That could partly be down to the limited number of potential bidders. Aluminium and uranium operations may also be streamlined if Rio can find buyers.
Glencore is reported to be keen to sell Joe White Maltings, Australia's largest malt producer. This could be the first of several disposals, many of which could be to sweeten its big Asian customer, China, in order to win regulatory approval to buy Xstrata. The deadline to complete the deal was this week extended for a fifth time as Glencore still hasn't got the required Chinese approval from the competition regulator.
Analysts reckon there's two obvious projects owned by Xstrata that Glencore could agree to sell to help advance its takeover. These are the Frieda River copper project in Papua New Guinea and the Tampakan copper and gold operation in the Philippines. These two assets could be attractive to Chinese parties seeking to secure future copper supplies from nearby regions.
BHP Billiton has proved that assets can be sold in the current depressed market. It offloaded diamond operations in November 2012 to Harry Winston for $500 million. BHP has sold several billion dollars' worth of assets in the past year and is expected to keep selling.
The majors are certainly being proactive with disposal efforts. The timing of any deal, sadly, remains a big unknown.