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Murray & Roberts Limited and Cementation Company (Africa) Limited (02/LM/Jan04) [2004] ZACT 47 (28 June 2004)

.RTF of original document

COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
 Case No.: 02/LM/Jan04

In the large merger between:

Murray & Roberts Limited

and                                

The Cementation Company (Africa) Limited


Reasons for Decision


Approval

1. On 18 May 2004 the Tribunal unconditionally approved the transaction between the abovementioned merging parties. The reasons for the Tribunal’s decision follow.

Background

2. This is a transaction in which Murray and Roberts Limited will acquire control of the Cementation Company (Africa) Limited from Skanska AB, a multinational company based in Sweden. It is intended that Murray and Roberts will acquire Skanska AB’s 79,13% controlling interest in Cementation Africa.

3. The transaction was notified to the Tribunal on 16 March 2004. A pre-hearing in this matter was held on 24 March 2004. The matter was heard on the 12th and 13th of May 2004.

4. Various witnesses testified at the hearing. The Tribunal subpoenaed three witnesses:

-       
Mr Les Jagger (General Manager of the Mining Projects Division at Impala Platinum Limited),
-       
Mr Herman Fourie (Financial Director of Shaft Sinkers) and
-       
Mr Andre Deventer (Financial Director of Master Drilling).

5. The merging parties called the following witnesses:

-       
Mr Henry Laas (Managing Director of Murray & Roberts RUC),
-       
Mr Brian Bruce (Group Chief Executive of Murray & Roberts), and
-       
Mr Timothy Wakefield (Director of the Cementation Skanska South Africa operations).

The Parties

6. The primary acquiring firm is Murray & Roberts Limited (“M&R”), a wholly owned subsidiary of Murray & Roberts Investments Limited, which is in turn controlled by Murray & Roberts Holdings Limited (“M&R Group”). M&R Group is a public company listed on the JSE Securities Exchange South Africa. The shares are widely held with the major institutions including Old Mutual and Liberty as well as the Public Investment Commissioners all holding significant stakes.

7. The primary target firm is the Cementation Company (Africa) Limited (“Cementation”), a firm listed on the JSE Securities Exchange South Africa. 79.13% of Cementation’s issued share capital is held by Skanska Cementation International Holdings Limited (a company incorporated in the United Kingdom), which is in turn controlled by Skanska AB (a Swedish construction, project development and facilities management firm). Cementation controls three subsidiaries in South Africa as well as other interests elsewhere on the continent.

8. M&R is a well-known South African construction company, which focuses on a wide range of construction and industrial manufacturing activities. M&R RUC is the division within M&R that provides mining contracting services and infrastructure development and is the business that is relevant in the context of the proposed transaction. RUC, originally a joint venture between M&R and Gencor, then a prominent South African mining house, has been wholly owned by M&R since 1997. It competes with the target firm, Cementation, in various product markets. RUC operates its business through two divisions, namely raise drilling and mining.

9. The services provided by RUC in the raise drilling division include raise drilling, shaft boring and exploration drilling. In the mining division RUC provides services such as mechanised and conventional horizontal and incline development, mechanised stoping and contract mining, mine and engineering design, shaft sinking and associated infrastructure, cementation and ground stabilisation, drop raising and long hole stoping, feasibility studies and associated construction and specialised support work.

10. Cementation is regarded as the leading underground mining subcontractor in South Africa. It operates two divisions, namely, drilling and mining. Its drilling division provides services such as surface drilling, underground drilling, raise boring and drop raising whilst the mining division focuses on underground construction and mine development, tunnelling and stoping, shaft sinking, and cementation and underground drilling.

Rationale for the Transaction

11. Skanska avers that the businesses in South Africa, Canada and Australia do not form part of its strategic areas of business. For M&R, on the other hand, the transaction is a significant step towards realising its ambition of becoming a pre-eminent player in a number of markets related to mining construction and development, markets which, it is argued, are increasingly global in character. M&R claims that this deal will enhance its ability to tender for major projects in Africa, outside South Africa, as well as in North America (mainly Canada), South and Central America, Australia and Southeast Asia.

Relevant product markets

12. There are two main methods of mining, namely pit mining and underground mining. The merging parties as well as a number of other large players in the broad mining contracting industry are active in underground mining. Open pit mining involves the mining of massive ore bodies characteristic of copper and iron ore. Neither M&R nor Cementation is involved in open pit mining. The skills and capital equipment required in undertaking underground and open-pit contracting activities are quite distinct and it is only the underground mining category that is relevant for purposes of this transaction.

13. In his testimony to the Tribunal, Mr. Laas, the managing director of M&R RUC, identified three broad areas of activity in underground mining, namely, ore body evaluation, infrastructural development and mining of the ore. Before commencing a mining operation, the ore body must be evaluated in order to determine whether the reserve is of a quality and size necessary to sustain a mining operation. Once a viable ore body has been established the necessary infrastructure must be put in place. This infrastructure essentially secures access from the surface to the ore body and enables the ore to be removed from the mine. Once access to the ore body is secured actual mining commences. One or other – or both - of the merging parties is engaged at each stage of the mining process.

14. As already noted, M&R RUC and Cementation group their activities in two broad divisions, namely drilling and mining. In the drilling division one or both of the merging parties are engaged in raise drilling and exploration drilling. In the mining division one or both of the merging parties are engaged in toll mining (“contract mining”), shaft sinking and mine construction, drop raising, cementation and underground drilling, construction and erection, and in mine design, feasibility study and project management.

15. A more detailed exposition of these activities follows:

15.1 Raise drilling

15.1.1 Raise drilling is a specialised technique for drilling vertical shafts. The purpose of raise drilling is to establish a vertical or an inclined excavation used for ventilation or ore passes. It is done by means of drilling a small hole of approximately 40cm in diameter from the surface to a horizontal shaft within the mine. Once the horizontal shaft is reached a reaming device is attached to the drill string and the reamer is pulled upwards whilst rotating. The rock, which is broken down as a result of the drilling, collects in the horizontal shaft and is then removed via the mine’s existing infrastructure. The drilling continues until the reamer reaches the surface. Upon completion a vertical shaft has been drilled. Raise drilling does not make use of explosives.

15.1.2 The parties argue that the holes being drilled can be classified into three categories or sizes, these being small, medium to large and very large holes. It appears further that different types of drilling machines are required to drill the different types of holes. The Commission’s investigation revealed that machines used to drill small holes could not be used to drill large to medium holes or very large holes. Again, machines used to drill large to medium holes are not strong enough to drill very large holes and inefficient to drill small holes. Nor, it appears, are the customers easily able to substitute different sizes of holes as each hole has different functional requirements, for example, for ventilation purposes or for removing ore.

15.1.3 In light of the above information, the Commission concluded that each of these types of holes drilled by means of raise drilling machines constitute relevant product markets. Only three players are active in the raise drilling market, namely M&R, Cementation and Master Drilling. It appears that Cementation does not own machines capable of drilling very large holes. M&R and Master Drilling both have the capacity to drill very large holes.

15.2 Exploration drilling

15.2.1 The purpose of exploration drilling is to extract reef drill core for mineralisation assessment by geologists. This is sometimes done from the surface while, in other circumstances, the exploration drilling process commences from existing underground excavations. Cementation and M&R are both active in surface exploration drilling as are other prominent players such as Boart Longyear and Rosond. It appears that a number of smaller companies are also active in this area.

15.2.2 Underground exploration drilling is used for purposes of assessing the quality of the ore body. It is principally used for short to medium term planning for mining purposes. Cementation, although not M&R, is active in underground exploration drilling. There are also other companies active in underground exploration drilling including Rosond, Boart Longyear, Pro-Drilling and other smaller black economic empowerment (“BEE”) companies.

15.3 Toll mining (also known as “contract mining”)

15.3.1 This involves the actual mining, stoping and removal of ore from the mine. This is generally viewed as the core business of the mining companies themselves, although recently outsourcing has even made inroads into this area. The merging parties indicated at the hearing that contracting companies are currently being invited to undertake this work on a project basis.

15.3.2 It appears that M&R is not active in this market. The existing players in this market are Cementation, JIC and BTX (prior to liquidation). We were informed at the hearing that Grinaker LTA is also currently undertaking this kind of work and that Shaft Sinkers has also started a project of this kind.

15.4 Shaft sinking and mine construction

15.4.1 Shaft sinking and mine construction primarily involves the construction of vertical shafts which are utilised for transporting workers and ore to and from the surface. Hence, whenever a new underground mine or a new section of an existing mine is started a vertical shaft must be constructed. The shaft is the main access from surface to levels underground to access the ore body. The shaft could either be vertical or declined. The engineers decide whether a vertical or declined shaft is required to access the ore body.

15.4.2 The minimum diameter for vertical shafts is 4.5 metres and in South Africa these shafts are of the order of 1 500 metres deep. A declined shaft has an average dimension of 4.5 metres to 3.5 metres at a gradient of 8 to 10 degrees. According to the parties, the deep level vertical shaft is primarily for gold and platinum mining and the shallower shafts would be for platinum in the eastern part of South Africa, chrome and coal.

15.4.3 M&R and Cementation are both active in shaft sinking. The other major player – in the South African market, at least – is a company called Shaft Sinkers. There are a number of other South African firms interested – it cannot be put much higher than that at this stage – in this sub-market. There are also international firms actively engaged in shaft sinking, some of which enjoy a presence in the South African market, usually in partnership with a South African firm. Among the better known non-South African firms active in the shaft sinking market are Deilmann Haniel (a German company), the Canadian-based, Redpath, and an Australian company, Brandrill. M&R is also active in this product market outside of South Africa.

15.4.4 The parties indicated that mine construction and development work, which refers essentially to the infrastructure required between the shaft and the reef, forms part of the shaft sinking and mine construction product market. It appears that the mining companies undertake much of this work themselves. However, all the major construction companies such as M&R, Cementation, Grinaker LTA, Deilmann Haniel, Concor and other small BEE companies such as Ubuntu-Ubuntu can do this kind of work, and many are already active in this area.

15.5 Drop raising

15.5.1 Drop raising is a method used to construct vertical excavations on a much smaller scale than is possible through raise drilling. This is used for ore passes and vertical dams for excavations of small diameter with a maximum length of about 50 metres and an average diameter of about 1.5 to 2 metres inside the mine. During this process, holes are drilled over the full length of the required excavation whereafter the holes are charged with explosives from the bottom. The hole is plugged and the explosives are detonated. The blasted rock falls down into the existing mine shaft and is transported out.

15.5.2 Firms currently engaged in drop raising include Cementation, JIC, Boart Longyear, Master Drilling and various other smaller players. It appears that M&R is no longer involved in the drop raising market.

15.6 Cementation and underground drilling

15.6.1 The parties submitted that the cementation process was the traditional product offering of the target company, Cementation. It involves the pumping of cement into mining cavities and fissures and the lining of underground shafts and tunnels with cement. It is done to limit the ingress of high-pressure water into the mining works. This process also stabilises underground operations and facilitates the development of underground shafts. Indeed, the parties claim that it is this process that made underground mining possible in many of those areas in which South Africa’s gold reserves are to be found. According to the Commission, the cementation process includes underground drilling and thereafter the pumping of cement.

15.6.2 M&R RUC is not involved in this activity. Firms which provide this service are Cementation, JIC, Rosond, Boart Longyear and other small players. It therefore appears that no overlap exists between M&R and Cementation in this sub-market.

 15.7 Construction and erection

15.7.1 It is indicated that this service involves minor construction work, which is not associated with major mining projects. It appears that small civil engineering firms can perform these types of projects.

15.7.2 Both the merging parties as well as Shaft Sinkers, Grinaker LTA, Deilmann Haniel and various other small players are active in this market.