Mick Davies, CEO of Xstrata.Justin Sutcliffe
Mick Davis, boss of global mining giant Xstrata, used the notion of a commodities supercycle to justify the fat premium paid for Canadian nickel miner Falconbridge in 2006. Two years later, when commodities crashed, his "stronger-for-longer" theory looked bogus.
Not any more. Commodities are back with a bang and the conventional wisdom is that the supercycle is intact, as growth in emerging economies powers forward. Now torrents of cash are flowing into the commodities industry. And where there is ample money and rising valuations, there are deals.
One in particular stands out - the widely expected initial public offering of Glencore International, the world's biggest commodities trader and Xstrata's 34.9-per-cent owner. Glencore has all the machinery in place for a spring IPO, though the company, led by the publicity shy Ivan Glasenberg, will not confirm it is ready to hit the IPO button.
Sources close to Glencore's underwriters - Citigroup, Morgan Stanley and Credit Suisse - say May is a good bet for the stock market listing. It will likely have its primary listing in London, with a secondary listing in Hong Kong. Glencore may raise as much as $10-billion (U.S.), according to various reports.
The Glencore IPO is touted by analysts and traders as the biggest commodities event of the year for more reasons than one. It is expected to trigger another round of mining consolidation, possibly starting with the merger of Glencore and Xstrata, as well as encourage IPOs among other commodities traders. That would open up a whole new investment class to commodity-craving investors.
The fear, of course, is that fast-rising values in the mining and metals sector will trigger a correction, or China's high-flying economy will hit a wall and puncture demand. For companies such as Glencore aiming to go public, these are reasons to move quickly on the deal front.
A senior executive at one of the world's top commodities traders said Glencore's access to the public equity markets will give it distinct advantages over its rivals. They range from the ability to use listed shares as an acquisition currency to allowing departing partners to sell their equity without depleting working capital or selling assets. "You can only grow so much with private equity," he said.
About a year ago, when it became apparent that commodities were on the rebound, Glencore took the first step towards an IPO by selling a $2.2-billion (U.S.) convertible bond to a group of high-profile investors, including BlackRock and GIC, the Singaporean sovereign wealth fund. The bond gave Glencore an implied value of $35-billion. Glencore's value is much higher now as commodity prices surge.
Some potential investors worry that Glencore will struggle as a publicly listed company, if only because its cherished secrecy will be compromised and because skilled partners may take the money and run. Executives close to Glencore, however, say that no partners intend to leave when the shares start trading.
The Glencore IPO could trigger a flurry of deal making later this year.
It's an open secret that Glencore wants to merge with Xstrata. That could give Glencore a back-door listing - Xstrata trades in London - without having to go through an IPO. But that appears unlikely. Sources say Mr. Davis wants the market to value Glencore before he considers such a deal. London's Liberum Capital says Glencore and Xstrata together would be a formidable trading and mining player that could "deliver the scale to undertake very large capital projects or transformational M&A," including the potential takeover of Anglo American, a company long coveted by Xstrata.
Other traders could follow Glencore's IPO lead. One big trader rumoured to be open to an IPO or a merger is Louis Dreyfus, an agriculture products (coffee, cotton, sugar) and natural gas trader controlled by the French family of the same name. In the autumn, Olam International, an agriculture trader listed in Singapore, said it was holding preliminary talks with Dreyfus about a possible combination of the two companies.
Another trader thought to be considering a public listing, if only for its industrial division, is Trafigura Group, the world's third-largest independent oil trader and second-largest trader of non-ferrous metal concentrates. Still another private trader that may eventually be tempted to go public is Vitol Group of the Netherlands, one of the world's biggest energy traders and storage terminal owner. One of its main competitors, Gunvor International, which handles about a third of Russia's oil exports, is also public.
Cargill of the United States, which just spun off Mosaic, its fertilizer division, could be an IPO candidate too, resource company executives say.
Investors keen on the emerging commodity trading space can take heart from the performance of Noble Group, the Singapore commodities-trading giant. Noble's IPO came in 1997. Since then, it has returned 3,100 per cent to shareholders, after taking share splits, dividends and bonus shares into account. The commodities supercycle, if it persists, will only make these investments more attractive.
Eric Reguly