A LONG-LIVED CAT.
The key to its success is location. Its CEO G.L. Barton, who previously headed Cat's Mining Group, said the culture and values (work ethic) of the (nonurban) Midwest have been crucial. He doubted the company would have survived if it had been headquartered in Chicago or New York. Constituents of success: ability to attract and retain high-quality employees, from the executive suite to the shop floor; R&D--with continuous product improvement; crucial acquisitions, e.g. Solar Turbines; independently owned dealers with "agreements crafted on trust, not by lawyers"; orientation to the customer on product development; and learning from mistakes. Its success can be measured in part by the fact that it exports 50-60% of its Midwestern plants' output, something few manufacturers based in the comparatively high-cost operating climate of the United States can claim.
Cat is looking for a 2-7% rise in sales for 2000. And, on August 30, Cat announced that it was giving itself a present of $1B. The sum will come from reduced labor, through normal attrition, and other measures, including Internet-based transactions, the latter expected to yield a $ 100M/yr benefit. The company's goal is to boost sales by 50%, to $30B/yr by 2006. Power generation is a key component, growing 20%/yr for the past five years. Sales in that segment are expected to treble, to $6B, by mid-decade.
RIO TINTO OUTBIDS ANGLO FOR NORTH
Rio Tinto issued compulsory acquisition notices for outstanding shares of North Ltd. on August 18, when its holding in the company reached 91.48%. Rio Tinto's bid for North, targeted especially at North's Western Australian iron ore interests, began in late June with an initial offer of $A3.80 per share (about $A2.8B) [August 2000, E&MJ, p. 12].
On July 21, Anglo American entered the fray with a counter offer of $A4.20 per share ($A3.1B). The Anglo bid received support from Japanese steel mills seeking to protect their pricing power over Australian iron ore, and to a lesser extent over coal.
On August 3, Rio Tinto answered resoundingly with an offer of $A4.75 per share ($A3.5B). Anglo American said it would not continue the bidding. North shareholders began tendering their shares at the $A4.75 level, and within two weeks Rio Tinto had acquired more than 90% of North.
In acquiring North, Rio Tinto becomes the world's second largest iron ore producer, with 100M mt/yr of production. North iron ore assets included a 54% interest in Robe River Iron Assoc. in Western Australia and 56.1% ownership of IOC in Canada. Robe River is developing its West Angelas project, targeting production of 7M-mt/yr Fe ore by 2003 and 20M-mt/yr within several years thereafter.
BHP, which produces more than 60M-mt/yr Fe ore, had previously been the second-largest iron ore producer behind CVRD, Brazil, which produces 130M-mt/yr.
Other North assets Rio Tinto acquired include ERA uranium operations in the Northern Territory of Australia, the Zinkgruvan mine in Sweden, a 25% interest in the Alumbrera copper mine in Argentina, and 80%, 50%, and 33.3% interests in the Northparkes copper mine, Kanowna Belle gold mine, and Peak Hill gold mine, respectively, in Australia.--LW
DE BEERS RAISES ITS PROFILE
Dominant world diamond miner and marketer De Beers spent an uncharacteristic, headline-making two months from late June through late August. Two hostile takeover bids, a huge change in marketing strategy, assumption of an active role in suppressing the sale of "conflict diamonds" used to finance African insurgencies, and reporting of extremely strong first-half financial results were all part of the mix.
De Beers began generating headlines when it initiated a hostile $C259M bid for Vancouver-based Winspear Diamonds in late June, the objective being Winspear's Snap Lake project in the Northwest Territories. Winspear was 67.8% owner and operator of the project, with Aber Resources as the minority partner. Winspear responded to the De Beers bid by initiating a "value recognition" program, releasing new resource data indicating the Snap Lake deposit could be three times larger than forecast a few months earlier. De Beers raised its bid to $C305M in mid-August, and the Winspear board accepted the new offer.
On the marketing front, at a London meeting on July 12, De Beers told major buyers that its Central Selling Organization would no longer function as "buyer of last resort" for the diamond market--controlling supply to support diamond prices. Instead, De Beers, which sells more than 60% of the world's uncut diamonds, would focus on being "supplier of choice." To mark the change, De Beers renamed its marketing arm, which is now known as the Diamond Trading Co. At the same time, De Beers said buyers of its diamonds would have to sign contracts assuring that they would not deal in "conflict diamonds." If found in violation of these contracts, De Beers will no longer sell to them.
One effect of De Beers' supplier-of-choice marketing strategy became apparent in mid-August when the company announced its first-half 2000 financial results. During the half-year period, selling from stock reduced the value of the De Beers diamond inventory from $3.989B to $2.721B, approaching the company's targeted $2.5B working stock level. Strong consumer demand, especially in the United States, and restocking in the retail pipeline supported the De Beers destocking strategy.
At the same time, De Beers announced that earnings from its own operations tripled to $696M during first-half 2000 from $231M during first-half 1999. Total earnings, including retained earnings from associate companies but before adjustments for exceptional items, climbed to $982M from $286M. Net profit, after adjustments, was $877M, up from $269M.-LW
BIDDING WAR FOR ASHTON
In late July, De Beers was back on the acquisition trail with a hostile bid for Ashton Mining, owner of 40.1% of the Argyle diamond mine in Western Australia, where Rio Tinto is the majority partner and operator. A month later, Rio Tinto weighed in with a higher offer, and as of this writing (Aug. 29,2000) the outcome of the bidding war was still unresolved.
Argyle is the world's largest diamond mine by volume, producing about 27M ct/yr and accounting for about 25% of world production. Its production, however, is low grade, accounting for only 6% of world diamond output by value. The generally small Argyle diamonds find profitable markets in low-end jewelry and industrial cutting and grinding applications. Since mid-1996, Rio Tinto and Ashton have been selling Argyle production themselves, bypassing the Central Selling Organization.
De Beers made an all-cash offer for Ashton of $A522.1M ($Al.62 per share) on July 31. The Ashton board rejected the bid as inadequate and urged shareholders not to sell. Rio Tinto's counter-bid came in at $A612.4M ($A1.90 per share) on August 29.
Should De Beers acquire Ashton, it would also gain marketing control of Ashton's share of Argyle production. Subject to existing contracts, De Beers would expect to begin selling Ashton diamonds through the Diamond Trading Co. no later than the beginning of 2002.
Other Ashton diamond interests include 100% of the Merlin mine in the Northern Territory of Australia, which produced 101K ct during first-half 2000, and a 33.3% interest in the Cuango project in Angola, where operations have been hampered by insurgency of the kind identified with "conflict diamonds." The company also has a 49% interest in the Mt. Weld rare earths project in Australia and a 35% interest in Australian-listed Aurora Gold Ltd.
Subsequent to De Beers offer but prior to Rio Tinto's counteroffer, Ashton reported net profit for the half year to June 30 of $A22.6M, doubling its first-half 1999 results. Ashton diamond sales for the period rose 15% to $A149.5M. Then, on August 22, Ashton announced results from a deep-drilling program that "provide further evidence of the significant potential of the underground resource earlier identified at Argyle. Diamond Hole DH319, drilled in the Central Vent area of the AK1 pipe, returned a high-grade intersection of lamproite grading 4.7 ct/mt over a distance of 392 m."
"As we foreshadowed last week when we announced our record profit result for the first half of 2000, Ashton expects future drill results to identify the potential for Argyle mine life to extend beyond the earlier estimate of 2018," said Ashton CEO, Doug Bailey. "These financial and drilling results highlight the inadequacy of the De Beers bid."
Whatever the outcome of the bidding war for Ashton, strong diamond sales and destocking have placed De Beers in the position of having plenty of cash. "This has given us a nice problem," said Chairman Nicky Oppenheimer. "We are looking to invest further in the diamond industry and our own business."--LW
Snapshot Then and Now, 1925-2000 Then Now Facilities 3 212 Employees 2,537 66K-plus [*] Products 5 300-plus [**] Dealers 89 195 Countries where products are sold 28 200 Sales $13.8M $19.7B (1999) (*.)Peak employment was 89.9K in 1979. (**.)Product lines total 18, with 244 products that are new or improved in the past five years.