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Material Matters: M&A, LNG, And Coal

Commodities | Mar 05 2019

Corporate battles, market restructuring and trade tensions drive commodities action

  • Global mining deals total US$114bn as sector consolidates, capital raisings fall
  • Battle between North American gold titans could mean rich pickings for local miners
  • LNG prices to remain high as east coast market restructures
  • Metallurgical coal holds up despite China ban; thermal coal price languishes

By Nicki Bourlioufas

Global mining sector consolidates, cuts back new capital raisings

The total value of financial deals in the mining sector worldwide fell by -14.9% in 2018 to US$114bn, according to data and analytics company GlobalData.

The value of mergers and acquisitions rose by 13.5%, but this was more than offset by a -32.4% decline in the amount of capital raised. Five countries made up 65.2% of the global total, with Australia the third largest in terms of deal value, behind China and Canada but ahead of the US and Indonesia.

The largest deal was Tianqi Lithium Corp’s acquisition of a 23.77% share in Chilean lithium miner SQM. China’s Tianqi bought the stake from Canadian fertilizer giant Nutrien for US$4.1bn. Chile has the world’s largest reserves of lithium, which GlobalData calls “a high growth commodity given the rise in demand for lithium ion batteries for electric vehicles”.

The five largest deals, out of the total of 3,000, were all worth more than US$2bn. Together they accounted for 15.8% of the global deal value. Another 60 deals ranging between US$500m and US$2bn accounted for 44.1% of the total value.

Aussie gold miners could pick up assets as North American giants wrestle for control

Ord Minnett says Australian miners could play a role in any deal that emerges from the skirmishing between Canada-based Barrick Gold and its US rival Newmont Mining. Barrick has launched a hostile all-scrip US$18 bn offer for Newmont, citing potential benefits of more than US$7bn if the two giants combine their operations.

Ord Minnett says consolidating Barrick's and Newmont's footprints in the US states of Nevada and Colorado would unlock valuable synergies, but it is unlikely that Newmont shareholders would be willing to share this equally with Barrick when Newmont is getting close to concluding its own US$10 bn bid for Canada’s Goldcorp.

The manoeuvring has the potential to shake loose some of the North American companies’ non-core Australian assets. Ord Minnett identifies potential buyers as Newcrest Mining ((NCM)), Northern Star Resources ((NST)) and Evolution Mining ((EVN)).

The stockbroker  says Newcrest could pay as much as US$3–4bn for assets without putting significant pressure on its balance sheet. With current market capitalization of around US$14bn, Newcrest has gearing of 11.5%, a net debt to operating earnings ratio of 0.6, and excellent operating cash flow. The Ords team rates Newcrest a Hold with a target price of $25.00 by December 2019.

Northern Star has already made its first foray into North America, buying the Pogo operation in Alaska in part with an equity raising that was very well supported. Ords says this miner is “the key growth stock within the ASX gold sector” and could look at more opportunities almost immediately. Ord Minnett rates Northern Star at Accumulate, with a target price of $10.20.

Evolution Mining is expected to generate $429m of free cash flow in 2018-19 and can look to allocate more capital to exploration, dividends and M&A opportunities in the next 12 months. Ord Minnett rates Evolution a Hold, with a target price of $3.40.

Evolution has recently paid $51m for a 19.9% stake in Tribune Resources, giving Evolution 8.4% of the East Kundana Joint Venture via Tribune’s holdings in Northern Star and Rand Mining. The stockbroker says the key question is whether the investment brings Evolution and Northern Star closer to discussing synergies or combining their Kalgoorlie businesses.

Structural changes in east coast gas market to keep prices high

Commonwealth Bank’s Global Markets Research says gas prices on the east coast are likely to stay high over the next decade due to changes in market structure. The team’s analysis looks beyond 2019, when the east coast gas market is expected to produce enough gas to meet expected export and domestic demand, according to an interim report from the Australian Competition and Consumer Commission in December.

The first long-term structural change is that LNG exports have linked international LNG prices to domestic gas prices. The linkage means that “LNG netback prices are now the best gauge of domestic gas prices”.

The second change is that Queensland will become the main source of gas for New South Wales, Victoria and South Australia. The higher cost of production in coalseam gas (CSG) is likely to result in gas prices above A$10 per Gigajoule.

Third, the growing importance of Queensland's gas production places a strain on the pipeline network connecting Queensland to the southern states. Improvements to the network and LNG import terminals have been proposed, but these would add to upward pressure on prices, suggests the report.

Price trends diverge for metallurgical and thermal coal

Morgan Stanley says prices for metallurgical coal and thermal coal may be heading in opposite directions. Metallurgical coal is trading at around US$211 per metric ton, supported by robust steel production in China and India and perennial fears about supply, but thermal coal is weak on soft demand for seaborne coal, resulting in prices of around $90/t (free on board Newcastle).

In late February, China’s Dalian port group said it would ban imports of Australian coal indefinitely, sparking fears of a nationwide ban. In 2018, China bought 50 Megatons of thermal coal and 39 Megatons of metallurgical coal from Australia, which represented about 5% and 12% of the respective seaborne markets.

But Morgan Stanley says China is unlikely to ban Australian metallurgical coal completely, as Australia's premium low sulphur hard coking coal is essential for its steel industry. No alternative seaborne suppliers can replace Australian metallurgical coal on a like-for-like basis, and China does not have enough high-quality supplies of its own.

Thermal coal is a different story.  Japan, the biggest buyer of Australia's thermal coal, has been cutting back on its Australian imports on weaker demand and diversification of supply. Japan took 81 Megatons, or 40% of Australia's exports of thermal coal, in 2018 but its imports in the fourth quarter of 2018 were down -4% on the same quarter a year earlier.

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