In-house sector focus: Going for gold
15 March 2004
There is something of a boom going on in the mining sector at the moment. In this most price-sensitive of markets, high commodity prices (for gold, hard metals and the like) have ensured a stampede of junior miners to AIM. And while the big three diversified miners – Rio Tinto, Anglo American and BHP Billiton – have been moderately quiet, mid-tier companies have been expanding aggressively. The market consensus is that miners and their legal advisers are flying high, and with the listing of Indian miner Vedanta on the London Stock Exchange (LSE) and Xstrata’s takeover of MIM, the sector is back in the spotlight.
Norton Rose partner Mark Bankes agrees. “A few years ago, the market lost interest in the sexier side of mining. It was all about the internet,” says Bankes. “Now the interest has come back.”
This so-called ‘sexier’ side of mining – the speculative world of mining exploration – has been buzzing of late. High commodity prices have combined with the previous lack of interest in exploration to ensure a sudden interest in risk mining. Common wisdom has it that only 1 per cent of reserves discovered ever goes into production. Exploration is thus an expensive and risky business and one that few public mining companies are willing to undertake. Accordingly, the mining giants have effectively outsourced the exploration function to small companies with seed capital, which set off around the world in search of reserves. It is, after all, far cheaper for BHP Billiton or Anglo American to simply acquire the few successful expeditions than to sink capital into exploration themselves.
The rise of these junior mining companies has been good news for AIM. While the tech sector was in the doldrums, 2003 saw a rush of flotations by smaller mining companies seeking to capitalise on the sudden interest. Indeed, 15 out of 60 initial public offerings (IPOs) on AIM last year were miners. Among them were the floats of Peter Hambro Mining, St Barbara Mines and Highland Gold. The law firm winners have been AIM’s traditional advisers – those mid-tier outfits for which the junior market and its companies are a natural home.
For example, Fox Brooks Marshall, which last year merged with Cobbetts, advised on both the St Barbara Mines and Highland Gold floats.
And the flood does not look like easing. Bankes for one is currently working on two AIM floats for mining companies. “London is the major centre for raising finance,” he says. “Even where there’s little liquidity in the stock, it’s useful for companies when they’re talking to banks to show they’re reputable enough to be listed on AIM.”
The organic life of risk mining companies provides lawyers at all levels of the market with a constant flow of work. Some float on AIM before embarking on mergers and acquisitions themselves, while others wait to be devoured by one of the major players. It is eat or be eaten for these junior companies, and either way, as Bankes says, “it creates a nice natural lifecycle and a good cycle of work for lawyers”.
On the main market, too, miners are stealing the limelight. One of the top performers in 2003 was South African miner Randgold.
Meanwhile, Vedanta was the second-largest float of 2003 and the first Indian company to have a primary listing on the LSE. It is an impressive showing for a sector that has long been regarded with suspicion by the LSE. Linklaters partner Charlie Jacobs, who advised on the float, thinks Vedanta will be the first of many Indian, Russian and Chinese mining companies listing in the UK. “London is a natural market for miners. People like getting into FTSE,” he says.
For the past five years, advisers to the top end of the mining market have been busy advising on mega-mergers for the mining giants.
Trying to hedge themselves against the perils of the market, and to gain what John Fast, chief legal counsel and head of external affairs at BHP Billiton, calls “large footprints in commodities”, the big miners sought to diversify their commodity base through a spate of mergers, most notably the BHP-Billiton and Rio Tinto-CRA tie-ins. The deals were a fees bonanza for legal advisers, but the lawyers agree that mega-mergers are probably a thing of the past. Consolidation has led to a paucity of target companies on the market, and if M&A activity among the mining giants has petered out, this is in part because there is very little left for them to go after. Also, the vigilance of the competition authorities has made it more difficult for the big miners to undertake mergers or acquisitions.
However, it would be a mistake to think that lawyers in the mining practices at City firms are twiddling their thumbs while the mid-tier firms are growing fat on AIM work. “The market’s increasing. AIM advisers are now doing work that wasn’t there before,” says Bankes. While BHP Billiton’s Fast admits: “It’s not been a great year in terms of iconic M&A deals,” City lawyers are discovering that it is the mid-tier miners making the most noise.
A prime example is Xstrata. Since its float in March 2002, the Anglo-Swiss company has pursued its dream of becoming a major diversified mining player, and the firms most closely associated with it – Freshfields Bruckhaus Deringer and Linklaters – are reaping the benefits. Less than a year after its float, it acquired Australian copper, zinc and coal producer MIM, a deal that doubled Xstrata’s size. Again, traditional corporate adviser Freshfields was drafted in, while Xstrata requested that Linklaters act for the banks.
Legal teams have responded to changes in the sector in vastly differing ways. Following the 2001 merger, Fast famously centralised his legal team at BHP Billiton and introduced a law firm-style billing culture. As yet, however, no one is following his lead. Xstrata operates a system of embedding lawyers within commodity business groups, while Rio Tinto – the second-largest miner in the world – maintains a lean legal team of only eight lawyers. Benny Levene, head of legal at Xstrata, insists: “We’d much rather recruit experienced general commercial lawyers and outsource complex specialised work where necessary.” The former Werksmans lawyer maintains that “you can’t build a whole in-house team with specialist practitioners as good as the guy in the firm who’s exposed to different clients every day. You just can’t match that.”
The industry’s status as a legal goldmine goes some way to explaining why City lawyers are so loyal to a sector that much of the public views with suspicion, if not outright contempt. “It’s a good sector for us,” says Jacobs at Linklaters, while Bankes goes further. “There are good characters in mining,” he says. “It’s a sector for promoters in many ways.” When asked to explain, he replies somewhat wistfully: “You know how you had the gold rush? Well, even today, these are guys who take amazing risks. A high percentage fail, but those who succeed end up with a lot of self-belief. They’re practical and pragmatic – and they’re used to being in the country.”
Whoever said mining wasn’t sexy?
|Organisation: BHP Billiton|
|Annual legal spend||$40m (£21.2m) internally and $40-$50m (£21.2m-£26.6m) externally|
|Chief legal counsel and head of external affairs||John Fast|
|Reporting to||Chief executive Charles Goodyear|
|Main law firms||UK – Herbert Smith (litigation) and Slaughter and May (main corporate adviser); US – Skadden Arps Slate Meagher & Flom (main corporate adviser) and Sullivan & Cromwell; Australia – Allens Arthur Robinson, Blake Dawson Waldron and Mallesons Stephen Jaques|
John Fast has seen monumental changes at BHP (as it was prior to its merger with Billiton) since he took on the role of chief legal counsel in 1999. Soon after, he famously centralised the legal team, pulling lawyers out of the business groups in which they were embedded and forming what is effectively a small private practice operating solely for the mining giant. Around 71 legal staff are scattered across 19 locations, but all report to Fast.
According to the tireless Australian, the new structure has had the benefit of making the legal team more visible and efficient and, importantly, “it’s given the lawyers a sense of identity”, he says.
Large, complex matters requiring in-depth regulatory or M&A expertise are outsourced to external counsel, but more routine matters are handled in-house. “For competition, corporate and environmental expertise, we’ll often go external,” says Fast. “That way we can make sure our advice is as current as possible.”
The market has shown a mixed response to Fast’s in-house revolution. One private practitioner commented: “We wouldn’t expect to see this trend spreading through the market – although lawyers’ fees are high, at least there are no hidden overheads.”
The plucky Australian, though, is steadfast. “This is inherently the most efficient way to run a legal group,” he insists.
|Organisation: Anglo American|
|Annual legal spend||N/A|
|Heads of legal||Ben Keisler and Peter Arthur|
|Main law firms||Linklaters and Shearman |
Head of legal Ben Keisler was the sole lawyer at Minorco’s London office before the Luxembourg-based mining company merged with Anglo American in 1999. Immediately, Keisler – who shares the head of legal role with his South African counterpart Peter Arthur – was faced with the challenge of integrating the legacy companies’ disparate legal teams.
The process has been a success, and today private practitioners speak of a “strong and coherent” group.
Anglo American’s legal team is largely decentralised, with just four lawyers split between the company’s London and Johannesburg headquarters. However, more than 40 lawyers are scattered across the globe, embedded within the business divisions in Africa, the Americas and Australia.
Keisler says the structure ensures that the legal team is answerable to profit and loss imperatives.
Keisler’s central team handles macro legal issues, including antitrust and acquisition work, while lawyers in the business groups spend their time largely on local issues. In South Africa, for example, mineral law reform is the major concern.
Formerly a corporate lawyer with the now defunct New York firm Battle Fowler, Keisler insists that the issues facing Anglo American are common to any diversified public company. However, the US lawyer admits that he finds "natural resources interesting".
|Revenue||4.3m ounces gold|
|Annual legal spend||N/A|
|Head of legal||Paul Fortin|
|Main law firms||Various including Linklaters, Minter Ellison, Skadden Arps Slate Meagher & Flom and Werksmans|
Paul Fortin was appointed head of the five-lawyer legal team at Goldfields in 2002. The effusive Canadian relocated to Johannesburg from his former job with Barrack Gold in Monaco.
In South Africa, Fortin has overseen the company’s landmark R4.1bn (£329.2m) black empowerment transaction, in which Mvelaphanda Resources will acquire a 15 per cent interest in Goldfields’ South African mining assets. Fortin is delighted with the deal, describing it as “a programme to empower black South Africans, but on a commercial basis”.
Outside its South African home, Goldfields is on a concerted international push following its 2002 listing on the New York Stock Exchange (NYSE). Today, around a third of the company’s shareholders bought in through the NYSE. “These guys bring an international outlook. They’re pushing us to diversify,” says Fortin.
Goldfields’ legal team is unusual in the sector in that its lawyers have specific areas of commercial expertise, with individual lawyers focusing on black empowerment transactions, regulatory work, exploration support and supply contracts.
However, Goldfields’ experience, far from being unique, epitomises the challenges facing in-house legal teams in South Africa’s mining sector. Fortin for one is unfazed. “That’s what makes the job so interesting,” he insists.
|Chief legal counsel||Benny Levene|
|Reporting to||Chief executive officer Mick Davis|
|Main law firms||UK – Freshfields Bruckhaus Deringer and Linklaters; Australia – Mallesons Stephen Jaques; South Africa – Werksmans; Spain – Uría & Menéndez; Argentina – Fortunati and Marval O’Farrell & Mairal|
When Benny Levene joined Xstrata in 1998, the company was a virtually unknown South African zinc and alloy miner with a market capitalisation of £500m. At the time of its hugely successful March 2002 float, the company’s chief executive officer Mick Davis issued its statement of intent: to become a major diversified miner. Two years later, after a period of ferocious acquisition, it is worth around £6bn.
However, despite its size and rapid growth, the company maintains a tight legal team of nine, headed by the ebullient South African Levene. The former Werksmans lawyer has eschewed the in-house route taken by BHP Billiton in favour of a lean team, organised along commodity lines. Lawyers report to the chief executive of their business unit.
“I came from a law firm and I saw how companies operated alongside in-house counsel,” says Levene. “I came to the conclusion that you can’t build a whole in-house team with specialist practitioners of the sort you’d see in private practice – the guy in a firm exposed to different clients and different deals. You can’t match that.”
Not surprisingly, as the head of legal of one of the sector’s most acquisitive companies, antitrust occupies much of Levene’s attention. “It permeates your acquisition,” he says. “We pay considerable attention to antitrust issues right from the due diligence phase.”
However, aggressive expansion has its upsides. “Because we’ve been so acquisitive, it’s been an exciting time to be here,” says Levene.