The eyes are blinking, the limbs are twitching. Mining companies are emerging from their two-year coma. Money is being raised and boardrooms are once again buzzing with deal talk. One deal in particular - the initial public offering of Glencore International - has the potential to make the entire industry sit bolt upright. The IPO is almost certain to happen next year and would trigger a flurry of other stock market listings, mergers and takeovers.
Owned by some 485 partners, none of whom speak to the media or flaunt their wealth, Glencore is the dark force in the commodities world. Run out of Zug, Switzerland, it is the world's biggest commodities trader and a mining company in its own right, with a broad range of public and private investments in coal, copper, nickel, zinc, aluminum, gold and oil. Its biggest single investment is 34 per cent of Xstrata, the Anglo-Swiss mining company that, in 2006, won the ferocious battle for Falconbridge (the loser, Inco, went to Brazil's Vale SA). Glencore also owns 9 per cent of Rusal, the Russian aluminum giant controlled by Oleg Deripaska.
Glencore's Goldman Sachs-style conversion from private partnership to listed company, by way of IPO or merger with Xstrata, has been an on-again, off-again rumour for at least a year. The rumours picked up momentum last December, when Glencore, led by Ivan Glasenberg, a South African-born accountant who emerged from Marc Rich's notoriously aggressive trading shop, sold a $2.3-billion (U.S.) bond that is convertible into Glencore equity. The bond valued the company at $35-billion, an amount that some analysts think underestimates its true worth by $10-billion to $15-billion.
Then the rumours died off, partly because Europe's sovereign debt crisis threatened to plunge the Western world back into recession and partly because Xstrata CEO Mick Davis discretely made it known that he was not necessarily a supporter of Mr. Glasenberg's preferred scenario - a Glencore-Xsrata marriage through a premium-free merger. Sources say Mr. Davis lost some love for Mr. Glasenberg in 2008, when Glencore derailed Vale's top-of-the-market offer for Xstrata.
The deal talk came roaring back this summer. It started when Nathaniel Rothschild, the former Atticus Capital co-president who is the son of British financier Jacob Rothschild, used Vallar, his investment company, to raise $1-billion for mining asset purchases. The Vallar IPO was more popular than expected, signalling renewed interest in the mining business. Mr. Rothschild also used the occasion to pump Glencore. "I think Xstrata and Glencore are two world-class businesses, and, if put together, they would be worth a lot more," he told Reuters.
He said he doesn't care how the companies come together as long as they do (he owns $40-million of Glencore convertible bonds). People close to Xstrata say Xstrata is a believer in merging the companies but would prefer a two-stage process: a Glencore IPO to give a proper market value to Glencore shares, followed by an offer for the Xstrata shares it does not already own.
Since then, analysts have been busy writing reports about the potential union of Glencore and Xstrata, what the enlarged company might look like and its strategic advantages, from the vast economies of scale across the supply chain to margin improvement through to Glencore's ability to market all of Xstrata's commodities. In a fresh report, London's Liberum Capital said the new company would have a market value of $75-billion. That would make it an instant super major, one capable of competing with the industry heavyweights - BHP Billiton, Rio Tinto, Vale and Anglo American.
Citigroup and Morgan Stanley are already advising Glencore on its big move. Sources say Glencore could hit the IPO or merger button as early as the first half of 2011 (the latter scenario would depend on winning over Mr. Davis and figuring out who would run the merged company). The mining and commodities industries expect the Glencore-Xstrata deal, whatever shape it takes, to trigger a deal-making frenzy.
As a stock market company, Glencore would have a takeover currency and access to public capital, giving it more potential firepower than its rivals and the ability to move faster when it spots a takeover or investment opportunity. Among its biggest competitors, only Noble Group, listed in Singapore, is publicly traded. The others - Trafigura Beheer, Gunvor International and Vitol - may have to follow Glencore and Noble onto the stock market. An industry that once guarded its privacy and operated largely in secrecy would be almost entirely open and transparent. Since these companies are not purely traders, they would be competing with the hard-asset mining companies for resource investments and takeover opportunities.
Then there is Anglo American. Xstrata's Mr. Davis has long coveted Anglo. Last year, Xstrata proposed a "merger of equals" to Anglo. Cynthia Carroll, Mr. Davis's Anglo counterpart, politely told Mr. Davis to get lost, which he did. The next attempt, launched by a company even larger than Anglo, and run by Mr. Davis and Mr. Glasenberg, two of the savviest bosses in the industry, may be harder to resist. And if the new Glencore were to put Anglo into play, rival bids would be all but certain.
Don't forget the Russian angle. Glencore's 9 per cent of Rusal, a company it helped create, gives it a window on Russia, one of the mining world's last frontiers, and a close relationship with Mr. Deripaska, another take-no-prisoners empire builder. Together, Glencore and Xstrata, with Rusal at their side, could have a lot of fun shaking up an industry that has been paralyzed since the credit crunch hit.
Eric Reguly