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Glencore, Xstrata target powerhouse mining merger

Xstrata’s Minera Alumbrera open pit mine in Argentina.


The pending marriage of Xstrata PLC and Glencore International PLC would create a mining powerhouse with both the muscle and the appetite to quickly gobble up smaller rivals.

Xstrata, which owns Canada's Falconbridge Ltd., is in talks with part-owner Glencore aimed at an all-stock merger that would reshape the industry by uniting what is already a formidable miner with the world's biggest commodities trader.

Xstrata said Thursday it was approached by Glencore, which already holds 34 per cent of the Anglo-Swiss miner. If a deal is struck, a giant with a market value of about $88-billion (U.S.) would be created overnight.

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Both companies are run by forceful chief executive officers, both are deal-making machines on their own, and together would be a formidable takeover force that analysts believe could target companies whose market value is at least $10-billion. In its own right, it would be huge in zinc, thermal coal, nickel and copper.

"The long anticipated merger of Glencore and Xstrata could set off a new round of consolidation in the mining industry," TD Securities analyst Greg Barnes said.

The timing of the talks suggests that Ivan Glasenberg, Glencore's South African-born chief executive officer, is trying to nab Xstrata before its new-project growth spurt potentially ramps up its value. He has coveted full control of Xstrata for several years, though various informal attempts failed to convince Mick Davis, his Xstrata counterpart, to unite the companies.

Mr. Davis also wanted a market value attached to Glencore before a merger was proposed. That happened last year, when Glencore launched a $10-billion initial public offering on the London and Hong Kong stock exchanges.

Details of the proposed merger, confirmed early Thursday, were not available, though analysts believe Glencore will have to pay at least some premium given the fairly substantial synergies, estimated at as much as $700-million, that would be gained in a merger. Xstrata shares rose 10 per cent, reflecting investors' expectation that a premium, however modest, will have to be offered.

Together, the enlarged company would be the world's fifth largest mining concern by market value, after BHP Billiton; Vale, which owns Canada's Inco; Rio Tinto, owner of Montreal's Alcan Inc.; and China Shenhua Energy, China's largest coal producer. Anglo American PLC would be sixth.

Data compiled by Credit Suisse Group point to a colossus in the making. Based on estimated 2011 results, the new company would have revenue of $211.3-billion, EBITDA (earnings before interest, taxes, depreciation and amortization) of $15.8-billion, and net profit of $7.5-billion. Mining would make up 83 per cent of overall revenues. Trading and marketing, Glencore's heart and soul, would make up the rest.

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An executive at one of the largest mining companies, who did not want to be named, said he doubted Glencore and Xstrata would radically change their strategy after a merger. Their style is to go after unloved, high-cost, second-tier mining companies and assets, improve their efficiencies and work them hard when prices are high. But the sheer size of the new company would allow a faster pace of acquisitions, he said.

Mr. Barnes thinks First Quantum Minerals, a copper and nickel producer, would become an alluring target for the new company. First Quantum already shares the Mopani copper project with Glencore in Zambia. Its Haquira copper project in Peru is adjacent to a big Xstrata copper project.

Other companies that might interest the new company are Fortescue Metals Group, an Australian iron ore company, and any of the publicly traded mining companies that are making a splash in Russia and the other former Soviet Republics. Copper giant Freeport might also be a takeover candidate. But with a market value of $44-billion (U.S.), it might be too big.

In 2009, Xstrata offered Anglo a no-premium "merger of equals." Anglo's CEO, Cynthia Carroll, who had spent much of her career at Montreal's Alcan, rejected the offer.

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

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