London Calling - August 2 2002

London Calling - August 2 2002

Brazil-Anglo merger could create world's biggest miner

Will Anglo American Corporation soon shoot to the top of the mining league? The world's third biggest mining company, based in London and with 40% of its operations in South Africa, may soon make a deal with Brazil's CVRD, Latin America's number one minerals conglomerate and the world's premier producer of iron ore.

If it does, Anglo's market capitalisation will rise from around US$ 20 billion to US$30 billion, putting it ahead of both BHPBilliton and Rio Tinto.

CVRD is interested in discussing a merger because its political risk premium is increasing the costs of raising new capital, while some of its bankers have already advised a link-up with Anglo. For the latter, a deal would enable it to diversify further out of South Africa. This week the company's share price fell dramatically, in the wake of the "leak" of a South African government proposal to grant a 51% "black empowerment" stake in all new mining projects.

Anglo has been continually frustrated over the past two years in making acquisitions - notably by Rio TInto which outbid it for iron-ore producer North Ltd, and Ashton Diamonds, both based in Australia..

"Unacceptable seizure"?

Some steel makers claim that CVRD, BHP Billiton and Rio Tinto - with a 70% share of the global iron ore trade - are effectively operating a cartel (Anglo bought its first iron ore assets, 20% of Kumba Resources, only this year). But London-based BHPBilliton and Rio Tinto won't take a merger lying down. The Brazilian government also has a "golden share" in CVRD, which it could use to stop what many Brazilians will regard as a politically unacceptable seizure of the country's most valued minerals enterprise. Nonetheless, Anglo has been operating there longer than other foreign mining companies, with the exception of Rio Tinto. It chose the then military-controlled state as its prime target for diversifying out of apartheid South Africa. Anglo also operates the country's major gold mine and, until recently, the Salobo copper joint venture with CVRD.

It's also worth remembering that a former Brazilian government went ahead with privatisation of CVRD despite strident and vocieferous opposition - and huge street demonstrations - from trade unions and left wing parties.

It's possible the Brazilian government will okay a "dual-listing" between CVRD and Anglo similar to that engineered between Rio Tinto and CRA in the 1990's and followed by BHP and Billiton last year.

The acquisition this month by the London-listed Anglo-Dutch steel maker, Corus, and Brazil's Companhia Siderurgica Nacional (CSN) - which has its own captive iron ore mine at Casa de Peras - could be a model to follow.

The period when national governments controlled their iron ore assets and down-stream processing facilities is long gone, likely never to be revisited. Primarily it is China's demand for steel that will decide over the next few years which mines and steel producers survive, merge, or go under. And if Anglo does take over CVRD the prospect of a thoroughgoing cartel cornering the world market is likely to be enhanced not diminished.

[Sources: Financial Times, London, 2/8/02, 18/7/02, Guardian (London) 18/7/02, et al]

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