Rise in demand prompts mining consolidation

| Friday August 6, 2010 00:00

In the past fortnight several Aim-listed mining companies in the nickel, diamond, chrome and coal mineral sectors have launched takeovers or been the targets of acquisitions in expectation that demand, especially from Asia, will keep prices high.

On July 21 Firestone launched a reverse takeover of Kopane Diamond Developments, which owns the Liqhobong mine in southern Africa, the third-largest source of undeveloped kimberlite - which can contain diamonds - in the world.

Also last month, Firestone became only the third independent kimberlite producer - along with Gem Diamonds and Petra - outside the big mining giants with the opening of a mine in Botswana with annual production of 100,000 carats. The Liqhobong acquisition, which the company expects will produce 1m carats per year, would push Firestone into mid-cap territory. The offer, which is expected to be endorsed by both boards in September, values Firestone at £47m and Kopane at £53m.

Philip Kenny, chief executive, said it was crucial to expand production to supply Asian demand. Although experts remain cautious because of concerns about the global economy, they say the steep price recovery of diamonds this year points to a structural lack of supply, leading to some forecasts of a 'peak diamond' situation. 'The price backdrop is a sign reserves and supplies are running down and supply is increasingly being driven by the emerging middle classes in China and India,' said Kenny.

Charles Kernot, a mining analyst at Evolution Securities, said that more companies realise they need scale by 2012 when the world economy is expected to have stabilised. 'It's still difficult to raise equity finance so companies that were thinking about going it alone are being forced to look at alternative approaches like combinations.' South America-focused Horizonte Minerals, for example, acquired the high-grade Araguaia nickel project in north Brazil last week from Teck Resources, Canada's largest diversified mining group, for £7.5m in an all-share deal. Teck took a 50 percent stake of the enlarged Horizonte.

Jeremy Martin, chief executive of  Horizonte, said the company plans to merge Araguaia with its neighbouring Lontra nickel project. The merged mines will have production capacity of 100m tonnes. Production is expected to start in 2011. Meanwhile, Chromex shares rose 40 percent to 27p in the two weeks since the South African chrome company revealed that it had received a bid approach of 35p a share.

On the same day, Australian coking coal producer Caledon rose 27.8 percent to 46p after it had received a bid approach from another unspecified source. Caledon recently ended discussions with coal and uranium explorers Polo Resources - itself a focus of interest after activist investor Weiss Asset Management said in July that it owned 4.3 percent of the company. (FT.com)