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Mon, Aug 21, 2006 - Page 10 News List

Flush mining firms wonder what to do with the cash


It's a dramatic time for global mining. Xstrata has finally prevailed in its long struggle to buy Canadian nickel and copper producer Falconbridge for US$17 billion, the biggest takeover of its kind.

London-quoted Xstrata faced fierce competition for its target, but as the takeover enters its endgame, observers could be forgiven for forgetting that extraordinary things are afoot elsewhere in the sector.

This month the City of London financial center has been reminded about the record-breaking profits generated by mines today.

Xstrata reported a 76 percent jump in pre-tax profits to US$1.9 billion for the first half-year, while Rio Tinto announced an 80 percent rise to US$3.5 billion. Anglo American's six-monthly profits were up to US$2.9 billion, with the global giant also returning US$5 billion to shareholders.

As demand for metals and minerals soars -- led by China's expanding economy -- companies in the extractive industries are flush with cash.

"The whole industry faces the challenge of what to do with this money: internal growth, acquisitions, special dividends or share buy-backs?" said Nick Hatch, an analyst at Investec Securities.

Investors remain equivocal about mining stocks, whose recent bumpy ride has failed to match the upward curve of commodity prices.

Commentators have suggested that certain firms' market valuations do not even match the value of their assets. Many have money to burn -- and with few new mines coming on to the market, another wave of consolidation among the bigger players looks inevitable. The metals market remains strong with nickel hitting new records on the London Metals Exchange last Wednesday; and the corporate scene was lit up by Antofagasta, the London-listed copper producer, paying ?200 million (US$376.28 million) for Equatorial Mining of Australia.

Now, speculation is swirling around Rio Tinto, which is rumored to be planning a major transaction. The company has even been linked to the North American aluminum giants Alcoa (market value US$26 billion) and Alcan (US$17 billion); such huge deals would have been inconceivable a short time ago.

BHP Billiton, also listed in London, will earn US$63 billion in the next four years, including US$33 billion with which to go shopping, according to Citigroup. Anglo American is in the middle of a reorganization, having sold its stake in AngloGold Ashanti in South Africa and announcing the sale of Highveld Steel for US$678 million.

But there's also doubt that demand alone accounts for the spike in commodity prices. Experts have suggested that hedge funds and speculators are simply piggy-backing on a rising market. And if the bubble bursts, some mining firms could find that prices no longer outstrip rising costs, or justify multi-billion-dollar investments in new projects.

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