Riversdale: Scramble in Africa

The Business of Mining - thebusinessofmining.com | January 3, 2011 | 11:32 am Energy Coal 

“Rio Tinto, one of the world’s biggest mining companies, has certainly seen something it fancies in Riversdale, an Australia-based firm that operates mines in Mozambique which produce both coking and thermal coal. Two days before Christmas Rio bumped up its offer for the firm to $3.9 billion. The bid says much about Rio’s ambitions and the battle that giant mining firms will face in getting their hands on the world’s mineral resources. …


Not all miners reckon that attempting mammoth mergers is the best use of their bulging wallets. Yet the remaining option of pursuing smaller, bolt-on acquisitions comes with problems too. Firms of the size of Riversdale are small enough for any number of potential bidders to be able to contemplate buying them.”

Source: The Economist, December 28 2010

Observations:

  • The Economist notices the risk of overpaying for ‘small’ acquisitions like Riversdale as many potential bidders can start a bidding war for the target.
  • A government backed Indian consortium, Vale, NMDC and Tata (a current shareholder) might emerge as competing bidders for Riversdale. A combined effort in which the Indians put in part of the >$1bln required infrastructure investment and obtain long term contracts to buy the coal might be drafted.

Implications:

  • Rio Tinto’s strategy in the coal business is to secure a portfolio of world class assets (large, long life, low cost). It recently divested its share in American Cloud Peak Energy andJacobs Ranch, trying to invest in larger assets that are closer to the Asian growth markets. If the investments in Oyu Tolgoi’s Copper asset in Mongolia prove successful, the company might consider buying into the nearby Tavan Tolgoi Coal asset.
  • In the aftermath of Cancun’s climate discussions the debate over the mining industry’s role in reducing carbon emissions is heating up. Should miners play an active role in reducing coal supply or is the miner’s only task to supply the natural resources the downstream industry needs?

©2011 | Wilfred Visser | thebusinessofmining.com

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