Breaking up is easy to do: Potential ‘Inco’ IPO highlights mining sector’s new reality

Douglas Bryce

Dec 6, 2014

Peter Koven, Financial Post, National Post


The great consolidation wave of the past decade, which so many experts said was permanent and irreversible, is being reversed in a big way. This week, Brazilian mining giant Vale SA said it may spin off its base metals unit in an initial public offering in Toronto, effectively brining Inco back to life. BHP is spinning off (some would say dumping) US$15 billion of assets into a new company. Other big consolidations such as OAO Severstal, Barrick Gold Corp., Kinross Gold Corp. and Cliffs Natural Resources Inc. are unloading assets for far less than they paid. And there are always rumours that Rio Tinto could shed its Alcan-led aluminum business as well.

So what did the big buyers of the past decade get wrong, and why are they now undoing so much of what they did?

To most people, the simple explanation is that they bought into the “China Supercycle” concept and genuinely believed metal prices would stay high for years on end. Indeed, the price tags on many of the big deals made no sense in the lower-price environment we have today. Rio Tinto has written off about US$30 billion of the US$38 billion it paid for Alcan because of weaker-than-expected aluminum prices.

“When people bought into the ‘supercycle’ theory on commodities, it really looked like this time was different,” said Doug Bryce, co-chair of mining at Osler, Hoskin & Harcourt LLP. “Fewer people believe that today.”

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