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Anglo stronger, fitter, better

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THERE'S an irony somewhere in the fact that on Good Friday, April 2, Xstrata's "put up or shut up" restriction ends in respect of Anglo American, the firm with which it wanted to merge. Does this mean the execution of Anglo's current management team is back on the agenda?

Unlikely. Since the "put up or shut up" clause was called by Anglo American in October, its share has raced up 45%, while Xstrata is comparatively only 36% stronger. When Xstrata first suggested a marriage, the two companies had roughly equal market values. The feeling is that for Xstrata to revisit Anglo American, it would have to be strongly outperforming it.

But that doesn't mean the merger and acquisition activity ends there.

According to a report by Citigroup Global Markets, the merger mania in the mining sector is set to resume, although not quite on the scale of 2007/2008 when a tie-up between Xstrata and Vale, and another between BHP Billiton and Rio Tinto were mooted.

Conditions are vastly improved for the diversified miners, however.

Capital expenditure for the industry is now estimated to be $10bn, a 27% increase in the last 12 months for budgeted capex in 2010 while planned capex for 2011 has grown 37% in the last year. Notwithstanding the improved bullishness as reflected by capital spend, there's still net cash generation likely.

According to Citigroup, the sector will have net cash of $4.5bn by the end of 2011, a first for the industry and a sign that reasonable corporate targets can be identified again. So what to do with the excess cash and much lighter balance sheets?

Anglo American has been identified again as a likely takeover candidate. But it's much harder to justify these days following the bolstering of the company's boardroom personnel, led by new chairperson, John Parker. There are also signs that Anglo Platinum, a key asset for Anglo comprising about a third of total market value, is starting to show improvements in cost control and in its safety performance.

The group's investment in De Beers is also starting to improve with demand for diamonds on the rise again such that the Diamond Trading Company, De Beers London company, could see total sales of $4.5bn in the current financial year from $3.2bn in the year before. De Beers has also gone some way to part solving its indebtedness following a refinancing which also provided it with $1bn in cash.

The expectation for Anglo American is that once it has sold part of its investment in the Minas Rio (MMX) copper project in Chile, it may turn its attentions to a buyout of Kumba Iron Ore in which it already has a 64% stake. Corporate activity in the iron ore sector has been robust - 52 deals since 2000 - but worth only $32bn suggesting that deals have involved relatively smaller companies. The point being that the buyout of Kumba Iron Ore by Anglo would be typical for the sector.

As for Xstrata, the big question mark is over what may happen to it should Glencore list as is still widely expected. Were that to be the case the cross-holding could be unwound creating an opportunity for an aggressor, although at $52bn, Xstrata is a major acquisition.

To avoid becoming someone else's dinner, what's the chance that as with Rio Tinto and BHP Billiton, Xstrata and Anglo American look at potential joint ventures over certain assets rather than a full-blown merger? The synergies Mick Davis, Xstrata CEO, said could be explored in a merger could be decent fodder for joint venture activity perhaps? Interestingly, many of these opportunities are in South Africa with both platinum and coal assets.

Mining Summit

The mining summit involving delegations from the Chamber of Mines of SA, unions and the South African government kicks off on March 30 (Tuesday).

Death by talk shop or an important trigger to impetus on a host of fronts, most importantly, regulatory consistency in the country's mining sector?

One of the big issues must be new order mineral rights. Susan Shabangu, South Africa's mines minister, said in February there would be a halving in the time it takes to approve new order mining licences and prospecting licences.

In an interview with Miningmx, the newly appointed Thabo Gazi, deputy-director general of licensing in the minerals resources department (and successor to Jacinto Rocha), said that improvements were being made although this was too late for Coal of Africa Limited (CoAL).

It's R450m Vele coking coal project saw capital costs vault R100m which the company imputed to delays in the granting of mineral licences.

Now there's speculation the licence hasn't been approved at all. Simon Farrell, a long-standing and open critic of government standards must be wondering what one has to do to invest in South Africa.

- MiningMX.com

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