M&A

5 March, 2010

South Korea Mining Report Q1 2010

South Korea Mining Report provides industry professionals and strategists, corporate analysts, mining associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on South Korea's mining industry.

With South Korea heavily dependent on third party sources for resources and raw materials, the government, as well as private companies, are looking for protection against future price fluctuations through overseas acquisitions in mine and mining facilities. Indeed, in September 2009, state-run Korea Resources Corp stated that it was in talks and was considering purchasing an equity share in Canada's Inmet Mining Corp. Korea Resources announced that a strategic alliance agreement had been signed, but no details about the size of the stake had been finalised. As the sixth largest importer of copper in the world, South Korea is very keen to secure supplies of the metal and increase its self-sufficiency for this vital commodity. To this end, at the end of October 2009, Korea Resources signed an option agreement for a 20% stake in Inmet Mining's Petaquilla Panama mine, along with fellow Korean firm LS-Nikko. The mine is thought to contain 1bn tonnes of copper.

A further example of this was seen in September 2009, when Korea Electric Power Corp (KEPCO) released a report announcing its intentions to have independent sources of raw materials account for 16% of supply by 2012. The company plans to achieve this through the acquisition of uranium and coal assets in overseas markets. The plan will begin in 2010, with KEPCO taking an equity share in a soft coal mine in the US and a uranium mine in Namibia. The company wants to expand its footprint overseas in order to diversify away from the waning domestic energy market and concentrate on other industrialised countries where demand is rising.

Meanwhile, in December 2009, in the biggest foreign investment deal of the quarter, South Korean steel giant Pohang Iron & Steel Co (POSCO) announced that it had agreed a US$5bn joint venture with Indonesia's Krakatau Steel to construct a steel plate plant. The facility - to be located in Indonesia's Bantem Province - is expected to have an output capacity of 2.6-3.1mn tonnes per year, which would contribute significantly to Krakatau achieving its production goals of 5mn tonnes a year. The investment comes as the market recovers, and increasing metals prices and rising demand are subsequently giving investors confidence in new projects. Meanwhile, in September 2009, it was announced that a unit of POSCO - POSCO Engineering and Construction - would be issuing shares in a domestic initial public offering (IPO). The total issuance of shares was expected to raise between KRW898.7bn and KRW988.6bn, with the additional funding reportedly to be used for infrastructure construction within the unit. However, as the date of the IPO grew closer, the reception to the offering cooled, with analysts feeling that the price range for the company was too high in light of the struggling market conditions. The company was planning a share offering of between KRW100,000-120,000 however it was indicated that the IPO offering would actually be closer to KRW80,000-90,000, much lower than the company was willing to go. As a result, POSCO Engineering & Construction cancelled the IPO with a view to relaunch when the markets recover.

Mining forecast

The authors believe that South Korea will not be as badly impacted by the global slump in the mining industry as some nations, because it relies heavily on imports for raw materials. As a result, many South Korean metals producers are taking the opportunity to agree low-cost tenders for raw materials. For example, in June 2009, five power utilities confirmed a 45% reduction in prices for thermal coal with Chinese suppliers. South Korean based Korean Resources Corporation (Kores) and Daewoo International also agreed to purchase a 7.5% share in a soft coal mine in Australia as a means to secure 1.5mn tonnes of bituminous coal annually. According to industry observers, the current landscape is similar to that witnessed in the aftermath of the Asian financial crisis, when many resources were sold cheaply and developed countries competed aggressively to acquire them. The current strategy for South Korean companies is to purchase mining areas that are known to be productive, rather than taking risks on new, unexploited areas. There are approximately 21 South Korean government agencies investigating the possibilities of developing natural resources in countries such as Cameroon, Congo and Krygzstan. Meanwhile, Kazakhstan - which is selling assets in order to meets it current financial difficulties - could be another promising target. After falling by 16.2% in 2008, the authors believe that the South Korean mining market will bounce back strongly in 2009, with growth of 26.63% projected. After that, more steady growth is expected and the report forecasts that the mining market will be worth KRW4.221bntrn (US$4.22bnbn) in 2014.

Source: http://www.researchandmarkets.com