Glencore and Xstrata would be ‘unique’ model

Financial Times

Watch out, there is a new kid on the block. A decade after the landmark merger between BHP and Billiton that created the world’s largest mining company, a combination of Glencore and Xstrata – if successful – would create a new breed of super-miner, with interests spanning the length of the value chain from the mine to the market. While many on Thursday described the proposed merger as “a reuniting” of two groups that everyone had long expected would get together, the combined force of a Glencore/Xstrata will force rivals such as Anglo American and Rio Tinto to re-examine their own strategies and could trigger a fresh round of industry consolidation.

“It would be a unique business model. Glencore provides the marketing and Xstrata the operational base. It could be a new model for the industry although it would be difficult to replicate by others. This is quite a unique circumstance,” said one long-term industry observer.

Nevertheless, most people do not expect a combined Glencore/Xstrata super-miner to stand still.

“One of the benefits of this deal is that it liberalises both companies. The combined group would have more strategic flexibility,” pointed out another long-term industry observer.

Neil Gregson, senior portfolio manager in natural resources at JPMorgan Asset Management, which has a 0.5 per cent shareholding in Xstrata, said: “For the mining industry, although companies have been saying it is better to build organically, given the capital cost inflation we’ve seen and what has happened to share prices one would hope we’re going to see M&A increase.”

Long-term Xstrata watchers said the only surprise about the deal was in the timing. Michael Rawlinson, head of natural resources at Liberum Capital, said: “The market is surprised that [Xstrata chief executive] Mick Davis has caved in so quickly [to Glencore]. However, the longer they left it, the less chance Xstrata had to get a premium. In three years’ time, Glencore would have been a seasoned stock with a bigger institutional share register. So there is an argument ‘why not do a deal now and get a small premium’.”

A shareholder in both companies said: “This was always a hard transaction to do – there are so many different agendas. We didn’t think it would happen for a bit, maybe the end of this year or next. But shareholders in both Xstrata and Glencore know that a combined entity offers a lot more than on a standalone basis. It is just the terms on which it is done.”

Anglo American, which turned down Xstrata’s overtures only a few years ago, is seen as the most obvious target if the merger succeeds. News of the talks will no doubt have made for interesting reading for Cynthia Carroll, Anglo’s chief executive, who has been recovering from hip surgery after a riding accident.

There was also scope for more consolidation among the mid-tier, said analysts. The past few years have seen entrants into the market from frontier regions such as Democratic Republic of Congo, Mongolia and Kazakhstan. Many of these have listed on the London market, among them ENRC and Kazakhmys.

Although a deal is not yet certain, most believe a combined Glencore/Xstrata could be announced at Xstrata’s Tuesday results.

“The key was giving Mick Davis the CEO’s job,” said another shareholder. “That was what was needed to get the deal done.”

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