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The next commodities king Add to ...

There may be less cynical reasons for Glencore's plan to go public.

People close to Glencore say changing the capital structure is all about positioning the company to grow in the belief that the best is yet to come for commodity prices. With access to the public equity markets, Glencore would have greater ability to buy big working mines, smelters and refineries. When you own a mine, you own the marketing rights to its output.

Glencore is said to believe that merging with Xstrata makes good financial sense. While Glencore already controls the marketing rights to a lot of Xstrata's production, including nickel and cobalt, its relationship with the mining company comes at considerable cost. To maintain its 34.4-per-cent ownership level, Glencore has had to spend billions buying into Xstrata rights issues over the last decade. Last year, when the credit crisis was hurting Glencore, it had to sell its Prodeco coal mining operation to Xstrata for $2-billion to avoid jeopardizing its liquidity reserves and credit rating (it cleverly insisted on an option to buy it back for $2.25-billion, probably far less than it's worth). It also needed the cash to avoid diluting its Xstrata stake.

Another reason for a stock market listing: To give Glencore's partners the ability to sell their equity.

When the latest generation of partners retires, they will want to get out with their bounty. At the moment, paying partners requires depleting working capital or selling assets. To preserve its equity base of about $16.7-billion, Glencore's partners early last year agreed to freeze the majority of equity payouts until 2012. With a stock market listing, the monetization of the partners' equity would be much easier - cash would not be walking out the door, giving Glencore a greater ability to buy fixed assets.

People close to Glencore say Mr. Glasenberg would prefer a merger with Xstrata over an IPO. The "intermarriage," as analyst Luc Pez of Paris-based Oddo Securities wrote in February, would create a formidable commodities player, ranking it third worldwide, measured by market value. The enlarged company would be the leading producer of zinc, copper and steam coal. It would have a window on to the Russian market, through the Rusal stake, and a global marketing network.

While the merger idea might be compelling to Glencore, Xstrata's Mr. Davis is apparently yet to be convinced. Xstrata won't comment, other than to say "there are no formal negotiations" between the two companies, though there certainly have been informal talks.

Mr. Pez thinks that Glencore's "opacity" and the difficulties in valuing its trading and marketing businesses would make any merger "tricky," all the more so because Mr. Davis would avoid any deal that jeopardizes value creation or credit ratings. An executive who knows Mr. Davis and Mr. Glasenberg highlights another potential complication - a leadership battle. "They're both very competitive," he said. "Who'd run it? Ivan isn't one to play second fiddle to Mick, or Mick to Ivan."

If a merger is not doable, an IPO seems the default strategy. There may be another option - a sale of some or all of the company to Chinese interests. Mining executives said Chinese resource companies would pay big for Glencore's global presence, contacts and trading expertise. Last year China Investment Corp. paid $856-million for a 15-per-cent stake in Noble Group, the successful Glencore rival that trades on the Singapore exchange.

Glencore isn't saying when it will change. No deal seems imminent - RBC Dominion Securities analyst Miriam Hehir expects a stock market listing in 2011 or 2012 - though it could come earlier. Mr. Glasenberg is nothing if not opportunistic. The turnaround in both commodity prices and Glencore's profits, driven by surging demand in China and India and the global recovery, could convince the partners to flip the switch later this year.

But change is certain, because capital and liquidity demands require the company to tap into the public markets, or possibly find an exceedingly wealthy investor, if it wants to grow. Some sort of deal has to happen by 2014. The owners of the Glencore convertible bonds agreed to accept merely average yields on the condition the bonds can convert to Glencore shares "upon a qualifying initial public offering" or similar value-adding event by that year.

Marc Rich probably would disapprove of a deal that would jeopardize the secrecy that underpinned Glencore's success. But the old rogue would be proud that the trading operation he launched almost four decades ago could be on the verge of super-major mining status.

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