You know that something is seriously awry in the global mining industry when the two smartest men in the room – Ivan Glasenberg and Mick Davis – are crouching under rocks. Mr. Glasenberg, CEO and co-founder of Glencore , the world's top commodities trader, is busy whittling down a mountain of debt in the wake of the company's submarine performance on the London Stock Exchange. Mr. Davis, the former CEO of Xstrata , launched X2 Resources a couple of years ago but has yet to do a deal.
The mining market, in other words, is moribund. No one is selling, no one is buying and values are still in retreat. If either Mr. Glasenberg or Mr. Davis were convinced the bottom had been reached, you would think they would find ways to swing back into deal-making mode, for that was what they did best.
Today's commodities markets are not about growth; they are about survival, and the body language of the industry's biggest players suggests that won't change any time soon.
Not too long ago, both men were joined at the hip and were regarded as the savviest, most aggressive – and most feared – operators in the market. Mr. Glasenberg, a South African-born accountant, later champion speed walker, trained at Marc Rich's infamous commodities trading company. With some partners, he bought out Mr. Rich's business in 1993 and renamed it Glencore.
A bit less than a decade later, Glencore shunted some coal assets into an essentially inactive company called Xstrata and recruited Mr. Davis to run it, with Glencore keeping a large minority stake in Xstrata. Mr. Davis, who is also from South Africa, had been an executive director of Billiton and left after its 2001 merger with BHP to form BHP Billiton , now the world's top mining company.
The duo were the great white sharks of the mining and trading world. They were propelled by their "stronger for longer" belief – the motto for their conviction that Asian growth, driven by the mass migration of humanity from the country to the cities, especially in China, would drive the prices of copper, nickel, zinc, coal and other commodities higher and keep them there for a long time. For many years, they were right.
Backed by Glencore, which bought into Xstrata's rights offerings, Xstrata went from a nonentity to one of the world's top mining groups in the last decade. Among its conquests was Canada's Falconbridge, bought in 2006 for a seemingly outrageous price, only to pay for itself in about two years. Glencore, meanwhile, refined the art of commodities trading by plucking profits from the entire value chain – from mine to railway to port to ship to warehouse to end-user. Superb market intelligence and steely trading nerves helped.
In 2011, after a remarkable rebound in prices after the 2008 crash, Glencore joined the London Stock Exchange. Two years later, it bought all of Xstrata, partly to offset ever-thinner trading margins. The takeover, which saw the exodus of Mr. Davis from the combined group, created a mining and trading monster with a market value of $70-billion (U.S.).
As it turns out, that was the last deal of any size in the mining business, for commodity prices soon turned soggy as China's phenomenal growth began to wane. But the bigger culprit was undisciplined expansion by the big mining companies in the mistaken belief that high Chinese growth rates would be the gift that keeps on giving until the solar system vanishes. Tens of billions of dollars went into iron-ore development in western Australia alone, almost all to feed Chinese demand. Canada made the same mistake in the oil sands.
In retrospect, Glencore's IPO was beautifully timed, turning Glencore's senior partners into some of the richest men in Europe, and Mr. Glasenberg, who owns 8.4 per cent of Glencore, into a multibillionaire. The IPO valued Glencore at £37-billion ($57.6-billion U.S.). Its value today is a mere £17-billion. Its one-year price fall of 65 per cent has made it the worst performer among the FTSE-100 companies.
Mr. Glasenberg is now busy chopping $10-billion out of Glencore's net debt of $30-billion. A couple of its African copper operations are being mothballed and two dividend payments are to be skipped. This week, Glencore sold $2.5-billion in new equity. So far, the capital-discipline effort hasn't worked; the shares lost 5 per cent on Friday.
The commodity sell-off can't take all the blame for Glencore's woes. Melding a mining company with a trading company was a bold experiment that, so far, hasn't paid off. The question is whether it ever will. Both sides have entirely different cultures and financial structures. Mining works on 10-year horizons and requires patient, long-term capital and high credit ratings. Trading, where the quick-buck artists reside, relies on short-term borrowing and high leverage. The trading-mining mix, which has been attempted on such a large scale, may explain why Glencore has fallen a lot farther than the big mining houses. The shares of BHP Billiton and Rio Tinto are off by about a quarter in the past year.
Mr. Davis's X2 Resources is not publicly traded, although it may end up on the stock market once it builds an asset base. So far it hasn't, even though it has committed sponsors, including a Canadian pension plan or two (they have not been identified). Mr. Davis may have avoided taking the plunge because he thinks asset prices haven't stopped falling. Or potential sellers aren't selling because they're waiting for their rivals to sell. Either way, Mr. M&A himself is uncharacteristically idle.
If the market were stuffed with mining bargains galore, you would think that Mr. Glasenberg and Mr. Davis would pounce. But Mr. Glasenberg is retrenching and Mr. Davis hasn't made his move. Each man has certain constraints, to be sure. But their moves, or lack thereof, suggest that the mining world is going to be a dead zone for some time. Mining investors take note.
Eric Reguly