Mining Journal - November 5, 1999, Volume 333. No.8556.

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Lead Story:

Ashanti reaches hedging deal

Ashanti Goldfields Co. Ltd of Ghana has secured a long-term agreement with its gold hedging counterparties to stave off the liquidity crisis that has been threatening the company's near-term financial position since the start of last month. The crisis arose when the sharp rally in the gold price and its associated lease rate, combined with the structure of Ashanti's hedging book, made the company liable for margin calls on its hedging position that were beyond its immediate cash resources (MJ, October 8, p.291).

The crisis precipitated a takeover proposal from Ashanti's 32% shareholder, London-based Lonmin plc, but the Ghanaian Government, a 20% shareholder in Ashanti with veto rights, has been active in attempting to generate options other than takeover as a solution. Following this week's hedging agreement, Ashanti formally rejected Lonmin's takeover proposal.

The agreement announced this Monday between Ashanti and all 15 of its current hedging counterparties relieves Ashanti of the need to post margin on any of its hedging contracts until December 31, 2002. Thereafter, until the end of 2003, Ashanti's credit limit before any margin payment must be posted will be "about US$560 million", twice its current level, falling to about US$420 million in 2004.

The counterparties will receive in exchange for these concessions unlisted warrants for mandatorily exchangeable notes, issued in three tranches expiring in 4.5, 5 and 5.5 years from the date of issue. The notes will exchange into Ashanti ordinary shares at the rate of US$4.75/share, that being the closing price of shares in Ashanti last Friday (October 29). Full exercise of the warrants would result in the issue of about 19.8 million new shares in Ashanti, equivalent to roughly 15% of the company's current share capital, and would generate US$94 million in cash for the company from the exercise price.

The agreement is subject to certain conditions. Ashanti is to produce a financial and operating plan by December 2, 1999 (or later with the agreement of the counterparties), in which it must demonstrate "that it has, and will continue to have, adequate financial resources for the conduct of its business ... (and its) sound long-term financial condition". The plan must be implemented within three months of its presentation. Ashanti must also secure renewal of its borrowing facilities that mature during the current quarter (to December 31), principally the first, US$95 million tranche of its US$270 million revolving credit facility, and arrange "sufficient new facilities to cover (its) working capital and capital expenditure commitments". Failure to satisfy the conditions will result in the cancellation of the warrants and the reinstatement of the current margin arrangements.

Ashanti indicates that its immediate development plans are centred on the 500,000 oz/y Geita project in Tanzania, which is on schedule for commissioning in the September quarter of next year. Prior to the cash squeeze caused by the hedging problems, Ashanti had been negotiating with a number of banks to secure the financing needed to complete the project. Geita requires some US$110 million for completion, resulting in a borrowing requirement for Ashanti of about US$100 million. The company is now concentrating on securing this sum and in renewing the first tranche of the revolving credit facility required under the hedging agreement.

Ashanti's share price showed little positive reaction to the hedging agreement, sliding by £0.04 in London on Monday to give up last week's modest gains and finish at £2.86/share. The value of Lonmin's takeover proposal (now withdrawn) of 16 shares for every 27 in Ashanti, made late last month (MJ, October 22, p.333), was worth £3.66/share in Ashanti by Monday's close (ignoring the small gold-price dependent element).

Comment: Attention now turns to Lonmin's next move, and whether or not the company will make a higher offer for Ashanti. Lonmin's current 32% interest does not confer control, nor does it provide access to cash flow other than dividends, which in Ashanti's case have been modest, as the company has largely used its cash to fund growth. Following the liquidity crisis, and the need now to fund Geita, the immediate prospects for dividends are significantly worse.

There has been much speculation about possible bids for Ashanti, but the obvious unwillingness of the Ghanaian Government to allow Ashanti to lose its independence despite the crisis suggests that future takeover proposals (by Lonmin or others) are unlikely to receive government approval unless they address the political agenda. Disposal by Ashanti of assets outside Ghana to raise cash is an obvious alternative possibility.

This all makes Lonmin's interest in Ashanti less attractive to mining companies that might otherwise wish to buy it, raising the question of how Lonmin can realise value from the shareholding. A resurrection of Ashanti's (now public) suggestion last year to merge with Lonmin, with Ashanti as the acquirer, might be acceptable to the Ghanaian Government, but acquisition by a lame duck is hardly likely to appeal to Lonmin's board. Perhaps Lonmin should consider releasing the value of its Ashanti shareholding through distribution to its own shareholders as a special dividend.

Extracts from Mining Week:

Zambia one step further

Following the ratification last week of an agreement whereby ZCI, a subsidiary of Anglo American, will acquire an 80% stake in Zambia Consolidated Copper Mines' Nchanga and Konkola divisions and the Nampundwe pyrite mine (<I>MJ<I>, October 29, p.337), Zambia's Mines Minister, Syamukayumbu Syamujaye, has since revealed that the government is examining bids for ZCCM's Nkana copper mine. This is the last major asset up for sale under the country's plan to privatise its copper industry - following the memorandum of agreement signed in August, an announcement is expected shortly concerning the sale of the Mufulira division's mine smelter and refinery to the Polish copper producer, KGHM.

Exploration spending falls again

Metals Economics Group (MEG) of Halifax, Nova Scotia, has now published the tenth edition of its 'Corporate Exploration Strategies', an annual survey that examines exploration spending worldwide.

MEG's estimate of total exploration budgets for 1999 is about US$2.7 billion. Exploration spending rose steadily from 1993 and peaked in 1997 at US$5.1 billion. There was a dramatic 31% slump last year to US$3.5 billion, and this year's decrease in exploration budgets represents a further, 23% fall.

'Corporate Exploration Strategies' is a two-volume 550-page study and is available, price US$9,000 in print or on the internet from Metals Econimcs Group, P.O. Box 2206, Halifax, Nova Scotia, B3J 3C4, Canada. Tel: (+1 902) 429 2880. Fax: 429 6593.

Encouragement for steel

Steel industry metals producers should receive some encouragement from the latest survey on the outlook for steel, undertaken annually by the Steel Committee of the Organisation for Economic Co-operation and Development (OECD). Having risen sharply in 1997, by 6.8% to reach 695 Mt, world steel consumption dipped by 2.3% in 1998 and apparent world steel consumption this year seems likely to fall by just under 3% to around 659 Mt.

However, there could be a recovery next year, with consumption rising by 4%, or even more.

Hatch buys BHP Engineering

The Canadian engineering firm, Hatch, is to purchase BHP Engineering, a unit of Australia's biggest resources group, Broken Hill Proprietary Co. Ltd. The terms of the deal have not been disclosed but it is expected to be effective as from November 8.The sale, part of BHP's ongoing global asset portfolio review, will result in the transfer of about 900 engineering employees and staff to the Hatch group.

Codelco's investment plans

The world's largest copper producer, Chile's state-owned Codelco, has set a preliminary investment figure for next year of US$433.7 million. However the major projects to which this investment would be directed have yet to be approved by the board. Thus, according to Codelco's executive president, Marcos Lima, there is no guarantee that they will be carried out. The projects include leaching operations and the purchase of trucks at Chuquicamata, an expansion at El Teniente, and a change to the technology being employed at Salvador.

Cyclical gold

The annual survey of the gold market by New York-based CPM Group* naturally devotes much attention to the gold-market activities of central banks, given that it was the moratorium on additional sales and lending by 15 such banks that sparked the dramatic rally at the end of September. CPM reminds observers that the price was already starting to rise before the announcement, which merely "fuelled" the increase. CPM argues that two of the three adverse factors in the market, heavy central-bank sales and weak investment demand, were already diminishing, and thus a "cyclical turn" in the market was under way. The third adverse factor, short selling by speculators, reversed in October after the central-bank announcement.

*'Gold Survey 1999', US$80 from CPM Group, 30 Broad Street, 37 Floor, New York, NY 10004. Tel: (+1 212) 785 8320. Fax: 785 8325. E-mail: jchristian@cpmgroup.com

Extracts from Comment and Focus:

Mining Investment In Iran

Iran is not only one of the world's major oil and gas producers, it also has a significant mining sector with a promising potential, particularly for copper (<I> MJ<I>, July 23, p.63). Hitherto closed to foreign investors, the government has now, quite formally, decided to open up the economy to international mining companies. Last month's International Mines and Metals Investment Forum in Teheran was intended to highlight and publicise investment opportunities in mining, and to present the new mining law and tax, and investment and related guarantees and incentives. The aim was also to engage potential international investors in a discussion on the large number of prospective opportunities which exist in Iran. These were highlighted by various Iranian state agencies, in particular the Ministry of Mines and Metals. Foreign participants included a number of major international mining companies such as Rio Tinto, Anglo-American/Minorco, BHP, Billiton, Noranda and North, numerous junior mining companies, suppliers of equipment and services currently operating in Iran, and a variety of mining promoters. There was almost no major private or international financial institution present.

The conference was meant to allow a public discussion between Iranian and foreign companies. However, rather than talking with the companies, the Iranian institutions talked at them and at each other, and the original purpose of the forum was overshadowed to some extent by the internal political requirement to give to all Iranian institutions an opportunity to present themselves.

There is little doubt that Iran offers substantial opportunities in the mining sector and that the government is well intentioned. But if it wishes to see concrete results it needs to understand how international companies operate and create an acceptable and unambiguous legal framework.

A risky business

Five years ago, when proposals to employ pressure acid-leaching (PAL) to treat Australian lateritic nickel deposits were given their first airing, many were dismissive that such projects, promoted mainly by junior companies and involving the use of largely untested technology, would succeed. If they did, it was surmised, there would be only a brief window of opportunity - perhaps two to three years - before the nickel market would feel the impact of the first production of nickel from Inco's world-class Voisey's Bay deposit in Canada.

However, with attempts to expedite Voisey's Bay frustrated, Inco appears to view the political risk in New Caledonia to be no greater than in Canada, and is now putting a major effort into developing its huge lateritic deposit at Goro, where it will employ its own proprietary PAL technology.

For all operators, it will still be some considerable time before it is known whether PAL is a reliable low-cost process. This has been a calculated risk foreseen from the outset but, as Voisey's Bay has shown, risks are not always obvious - acquiring a world-class deposit is sometimes the easy part.

Headlines from Industry In Action:

Exploration

• San Simon gold assays
• Namco granted second mining licence
• Kainantu intersections
• Ferguson Lake results
• Renström mine exploration assays
• Romanian interest grows
• Ashburton exploration
• Japanese team leaves south Kyrgyzstan
• Phuoc Son intercepts
• Second Mauritanian kimberlite

Development

• Morila resource increase
• Candelaria silver mine deal
• Connemara gold resource rises
• Diavik given 'green' light
• Vietnam demands environmental bond
• SASE development partnership
• Board approves Koolyanobbing facility
• Marlborough's Ardlethan progress
• First Aragarças diamonds
• Toho opts for Antamina feed
• Pan Australian encouraged at Puthep

Production

• Lupin gold mine reopens
• Russia to resume gold exports
• Ellington to close
• World copper capacity to rise
• Chilean copper mines update
• Alumbrera production reduced
• Ivan mine bought by Milpo
• SoG plans tantalum output increase
• Nickel supply doubts
• Nalco shipping hit by cyclone
• Billiton to sack 500
• Cuango River reopens

Headlines from Technology Today:

• Better traction from Liebherr
• Multotec samplers for Amplats
• MTB to oversee Selene project construction
• Nordberg to acquire Centric

Extracts from Mineral Markets:

Nickel storms ahead

The price of nickel reached its highest level on the London Metal Exchange for 31 months this Wednesday, with three-months metal closing on the late kerb at US$8,070/t. The market has been strengthening steadily in recent weeks, encouraged by improving fundamentals. On the demand side, the prospects for stainless steel, which consumes about 65% of the world's nickel, are looking brighter (this issue, p.362). On the supply side, the seven-week labour dispute at Inco's Manitoba division, and the continuing commissioning problems at Anaconda's Murrin Murrin project in Western Australia, have both served to underpin the market. Also, nickel inventories in LME warehouses have fallen to 47,566 t, from nearer 66,000 t in early January (when LME nickel was trading at a lowly US$4,000/t).

Warehousing discussion paper

Over the years the subject of the warehouses of the London Metal Exchange have proved a contentious issue. Warehouse location, charges, contracts and their very existence all being the subject of vigorous discussion at various times. To try and better define the future relationship between the LME and its warehouse, the exchange has issued a warehousing discussion paper.

The first question that the exchange posed was that should it continue to operate a physical delivery warehousing regime, or should it rather introduce a trading system that contemplates settlement by payment of monies.

Other issues raised for discussion included whether the LME should seek to publish information on stocks of warrantable metal stored at LME warehouses, whether the LME's policy regarding good delivery points should be reviewed and whether it should manage the its warehousing locations more actively. It asked that any responses to the discussion paper along with any other comments on warehousing issues should be submitted to the exchange by the end of December 1999.

Minor metals lack lustre

Without exception, the minor metals markets weakened further during the month of October. Large warehouse stocks held antimony back, bismuth dropped as Chinese returned to the market, cadmium suffered as buying interest from India disappeared, and low prices offered from China kept chromium down

Highlights from Mining Finance:

Cash flows help Noranda expand

The Canadian metals and mining group Noranda Inc. almost tripled its earnings in the three months to September 30, 1999, to C$63 million compared with C$22 million in the corresponding quarter of last year. The improvement was the result of both higher sales revenue and lower costs. Noranda's improved performance has helped the group to generate C$145 million in operating cash flow during the September quarter, almost double the amount of the corresponding period in 1998. This cash, along with cash reserves from the proceeds of last year's sale of Noranda's energy business, was used to fund C$326 million of capital expenditure during the quarter, bringing the nine-month total capital investment to C$885 million. Cash reserves at the end of the quarter were reduced to C$746 million.

LKAB sees long road to recovery

The tendency of the price cycles of bulk commodities to lag behind those traded on terminal markets is illustrated by the latest results from the Swedish iron producer LKAB. The group made a net loss of SK170 million for the eight months to August 31, 1999, compared with a profit of SK791 million in the corresponding period in 1998. Whereas base metal producers are starting to record improved revenues, LKAB notes that the "slump in the iron and steel industry is leading to lower prices and sales". Although the worldwide seaborne trade in iron ore is scheduled to increase next year to 415-420 Mt, from an expected 400 Mt this year, LKAB argues that a continued oversupply in iron ore makes it hard to "foresee any speedy recovery".

GFL and Western Areas swap mineral rights

The rationalisation of mineral rights held by the major South African gold producers continued this week, with an exchange between Gold Fields Ltd (GFL) and Western Areas Ltd of ground containing in situ resources totalling about 4 Moz. GFL will transfer to Western Areas its rights to ground that lies to the west of the latter's current lease area but east of the Witpoortjie-West Rand fault, plus rights to ground in the Zuurbekom area. Western Areas will cede in exchange rights to ground lying to the east of GFL's Kloof mine and west of the Witpoortjie-West Rand fault, plus rights to ground in the Doornrivier area. GFL will additionally pay to Western Areas a royalty based on the gold revenue from the Doornrivier and Kloof East rights, at 2.5% if the quarterly average spot gold price is less than US$400/oz or 2% if it is higher.

Gold's rally too late for South African results

The excitement in the gold market since the end of the September quarter, including a rise in the spot price from US$255/oz to around US$300/oz, has tended to obscure the very great pressure that gold producers experienced during the three months to September 30. AngloGold Ltd described the September quarter as "one of the most challenging in living memory". The spot price averaged US$259/oz during the period, 5% less than in the preceding, June quarter, and for the South African producers the price weakness was exacerbated by a slight strengthening in the local currency, which gave a total price fall of 6% in rand terms.The other giant of the South African gold sector, Gold Fields Ltd (GFL), was less well protected against the fall in gold price, receiving an average of R52,674/kg (US$269/oz) in the September quarter, 3.4% less in rand terms than in the June quarter.

Extracts from Market news:

The South African gold producer Gold Fields Ltd (GFL) plans to acquire the minority interests in its 54.2%-owned subsidiary St Helena Gold Mines Ltd. GFL is proposing a 'scheme of arrangement', in which shareholders in St Helena would receive one share in GFL for each share held, representing a 62% premium over the average market price of shares in St Helena for the 30 trading days prior to announcement of the plan.

The London-based natural resources group Anglo American plc has confirmed that it has approached the UK aggregates group Tarmac regarding a possible takeover offer.

The US copper producer Cyprus Amax Minerals Co. has completed the sale of its 29.7% interest in Toronto-listed Kinross Gold Corp., at C$4.00/share, to an underwriting syndicate for onward sale (MJ, October 15, p.314).

Australian-based Kagara Zinc Ltd, an unlisted company, plans to raise A$10.5 million through a flotation and the issue of 30 million shares at A$0.35/share.

The London-based offshore diamond producer Namibian Minerals Corp. (Namco) has secured control of Ocean Diamond Mining Holdings Ltd (ODM). Both companies hold marine diamond concessions off the coast of Namibia. Namco launched a cash-and-shares takeover offer for 34%-owned ODM two months ago (MJ, September 10, p.210), and by the time the offer closed last week had received sufficient acceptances to raise its total interest to 92%.

People

The chief executive of the London-based Rio Tinto group, Leon Davis, is to retire next April. Mr Davis will be replaced by Leigh Clifford, currently head of Rio Tinto's energy division.

Terence Wilkinson, chief operating officer - mining for Lonmin plc, has left the London-based group. He will remain a consultant to the group.

The newly-elected President of Indonesia, Abdurrahman Wahid (MJ, October 22, p.322), has appointed Lieutenant-General Bambang Yudhoyono as Minister of Mines and Energy, replacing Kuntoro Mangkusubroto.

The Angolan mines minister, Manuel Bunjo, is reported to have died of a heart attack at the age of 67.

Margaret Witte has been appointed chairman and chief executive of Eden Roc Mineral Corp., replacing Harry Quint in both roles.

The US-based coal producer Peabody Group has appointed George Holway as vice president of business development, following the resignation of David Hegger.

Christopher Jennings has announced his intention to retire as chief executive of the diamond producer SouthernEra Resources Ltd at the end of this year.

Denver-based Golden Star Resources Ltd has appointed Peter Bradford as chief executive effective from the start of this month, replacing Jim Askew who left Golden Star at the end of October (MJ, September 24, p.249).

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