Gossip – the only commodity worth digging up

As mining falls victim to the global financial crisis, Mark Leftly sifts through the speculation on takeovers and corporate collapses
Click to follow

Rumour and counter-rumour is plaguing the mining industry, a result of Rio Tinto's sudden pledge this month to cut 14,000 jobs and sell assets to reduce a US$39bn (£26bn) debt mountain.

Mining had been the darling of investors, seemingly protected from the global financial crisis by the ravenous appetites of China and India for commodities. But the Rio Tinto announcement confirmed the correction in the commodities market. BHP Billiton dropped its $62bn bid for Rio last month, and the Vancouver-based mining giant Teck is already looking to sell a minority stake in Fording Canadian Coal Trust, which it bought in the summer. Citigroup has been hired to find a purchaser and is thought to be seeking at least US$2bn to help cover a $5.8bn bridging loan that matures in the third quarter next year. That loan was used to help fund the Fording deal, which had a $14bn price tag.

The correction has been sharp and taken many industry observers by surprise. "I don't have any answers for why this has happened so fast," laments one mining adviser.

However, others blame the Beijing Olympics. A leading London-based mining banker says the demand for metals for the games helped mask an underlying trend of slowing demand in China.

"Where the resource sector started to go wrong was believing that China created a decoupling in commodities [from the global depression]. You can have globalisation or decoupling but not both," says Peter Bacchus, the international head of mining and metals at Morgan Stanley.

Demand has been hit by "a severe consumer recession" in products that are metals intensive, such as cars and air conditioners, he says.

In London, considered the centre of the corporate side of world mining, there is already gossip that some companies will not survive the crisis. "This is just as sharp as the decline in banks' fortunes," says an industry rainmaker. "Many banks had to be rescued and I have no doubts that some mining companies will go to the wall."

Some of the leading groups are rumoured to be shuffling advisers, ensuring that the bankers close to them do not have conflicts of interests. Such conflicts include having a history of working with rival miners that might emerge as corporate predators in 2009. Some of this speculation checks out, some does not, such is the feverish speculation at present.

One of the big rumours is that BHP could yet return for Rio. The deal fell apart for several reasons but perhaps the most important was the increase in the offer to 3.4 BHP shares for every one in Rio, from a mooted figure of around three last November.

As share prices started to fall, the offer, masterminded by Goldman Sachs, began to look too generous. Marius Kloppers, the gum-chomping chief executive at BHP, heeded some shareholders' concerns and pulled out.

Research released by UBS last week suggested that Mr Kloppers could make another –almost certainly less generous – offer in late 2009, while X-strata could also revisit a collapsed proposal to take over fellow miner Lonmin.

"Everything is happening very quickly," says a mining source – by which he means that every rumour and counter-rumour must be treated with suspicion.