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Xstrata CEO Mick Davis was rebuffed by Anglo American in 2009 when he offered the company a 'merger of equals.' (Justin Sutcliffe For The Globe and Mail)
Xstrata CEO Mick Davis was rebuffed by Anglo American in 2009 when he offered the company a 'merger of equals.' (Justin Sutcliffe For The Globe and Mail)

Eric Reguly

A giant Xstrata-Glencore would surely take a run at Anglo American Add to ...

If I were Cynthia Carroll, CEO of mighty Anglo American, one of the Big Four mining giants, I’d be more than a tad nervous right about now.

In 2009, Xstrata, the Anglo-Swiss mining company that owns Canada’s Falconbridge, offered Anglo a no-premium “merger of equals.” Ms. Carroll, who had spent much of her career at Montreal’s Alcan, politely told Xstrata boss Mick Davis to take a hike. He did, and concentrated on organic growth.

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The next lunge at Anglo may not be so easily repelled. That’s because Xstrata and Glencore International, the world’s largest commodities trader, confirmed that they are in merger talks. If the deal, revealed Thursday morning, were to succeed, it would create a super-giant that could compete with the industry’s heavyweights -- BHP Billiton, Rio Tinto, Anglo American and Vale.

Xstrata, which is already 34 per cent owned by Glencore, and Glencore together would have a market value of more than £50-billion. That’s almost 40 per cent higher than Anglo’s value. In other words, Xstrata-Glencore could probably afford to pay a high price and go hostile, if necessary.

Mick Davis, the CEO of Xstrata, and his Glencore counterpart Ivan Glasenberg, have long coveted Anglo American. Their interest in the company probably goes beyond hard-nosed value judgments. Both men are from South Africa (though Mr. Glasenberg is an Australian citizen), where Anglo is synonymous with mining. The company was founded in 1917 by Sir Ernest Oppenheimer and J.P. Morgan in Johannesburg and went on to become a global force in iron ore, coal, copper, platinum, nickel and, through De Beers, diamonds.

And both men are takeover machines. Mr. Davis used more than $30-billion (U.S.) of deals since Xstrata’s initial public offering in London in 2002 to turn a rag-tag collection of assets, including coal mines bought from Glencore, into a global powerhouse. Falconbridge was his biggest purchase. In 2006, after one of the longest and most vicious hostile takeover attempts in mining history, Xstrata bought the company for about $18-billion (Inco, which had agreed to merge with Falconbridge, went to Brazil’s Vale).

Xstrata later went after platinum producer Lonmin, but abandoned the takeover attempt after the 2008 credit crunch triggered a commodities collapse that came close to wrecking both Xstrata and Glencore.

Glencore, for is part, went public last year in a $10-billion IPO in good part to give it an acquisition currency. Mr. Glasenberg, who has been Glencore’s CEO since 2002, has long believed that commodities are in a long-term bull market, driven by thriving economies in Asia. To him (and Mr. Davis), the recent slump was merely a blip.

Putting Xstrata and Glencore together will be no easy task, because Xtrata is a pure miner and Glencore is a hybrid mining and trading shop, where the traders dominate. There are bound to be culture clashes. But if they get the merger right, the enlarged company, which presumably will be called Glencore, has the potential to be a formidable force on the global mining scene.

The new company would benefit from more than sheer bulk and notoriously aggressive management. It would also have superb market intelligence, through Glencore’s network of 2,000 employees in about 40 countries. Many of them are traders and marketers, who know which buyers want which commodities when, giving the company an intimate view of supply, demand and trends.

The company is in the logistics business too. It owns or leases 170 cargo ships, plus a network of warehouses. Glencore also owns mines and finances mining projects in exchange for the marketing rights for their output (the company already markets most of Xstrata’s commodities).

Deals in the mining industry have been fairly slow since 2008. BHP dropped is pursuit of Rio Tinto and the Canadian government blocked its bid for Potash Corp. of Saskatchewan. The other biggies, Xstrata among them, have fiddled around the edges or concentrated on organic growth. The arrival of a merged Glencore-Xstrata will shake up the industry overnight. Anglo beware.

Follow on Twitter: @ereguly

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