February 3, 2012 [The Telegraph] - Rumours that a huge credit facility was being put in place were the first signal to the market that the mining mega-deal it had been anticipating for years was finally in play.
The initial chatter late on Wednesday was far off the mark: that the behind-the-scenes preparations meant Xstrata was bidding for rival Anglo American, a “hilarious” proposition to seasoned industry watchers.
But events soon became clear. Glencore, the commodities trading giant, and Xstrata, the fourth biggest miner in the world, were in talks to merge.
The deal, if it stays on track, is set to be the mining industry’s biggest to date and will give birth to a new corporate titan.
With a market capitalisation of £50bn-plus, the combined Glencore-Xstrata group would weigh in as the FTSE 100’s seventh largest member, say analysts.
The tie-up was long-anticipated – so much so, in fact, that one efficient Glencore executive registered the website domain name Glenstrata.com back at the end of 2010, according to Bloomberg.
The question on many lips on Thursday was whether this deal now fires the starting gun for a slew of mergers across the mining sector, as rivals compete to gain size.
The numbers might suggest so. The commodity boom of recent years has left miners cash-rich with strong balance sheets. Plus, consolidation makes sense in a business of scale like theirs.
Bigger is generally better when you have to invest in enormous, expensive projects and must regularly wrangle with governments over taxes and royalty schemes.
The financial crisis pretty much put an end to the era of big mining M&A, but hopes are rising. However, among the industry’s biggest players, further consolidation is at least as likely to spring from the Glencore-Xstrata entity as it is from rivals, say industry watchers.
The combined group looks set to be the “number one predator” out there, according to Michael Rawlinson, head of mining at investment bank Liberum Capital.
Management at the two companies are certainly versed in deal-making and the leadership of the new group will draw from the ranks of both, given that it is billed as a merger of equals.
Investors are already looking to who exactly might be in their sights. Shares in Anglo American – subject to a failed approach by Xstrata in 2009 – closed up more than 3.5pc on Thursday day on speculation that the miner could be a target.
Rawlinson suggests Rio Tinto is just as likely a prospect, given its iron ore assets, an area in which Glencore and Xstrata lack exposure.
ENRC, the blue-chip Kazakh miner criticised over corporate governance issues, is seen as another possibility, likewise offering exposure to iron ore.
The future of Lonmin, the platinum producer in which Xstrata has a stake, could also be up for discussion. Platinum mining is an expensive business and you cannot trade it in bulk like iron ore and coal.
Meanwhile, what will the rest of mining’s major players be doing? BHP Billiton, the world’s biggest mining group, is spending money on “bolt-on” acquisitions – albeit very large ones.
Vale, the Brazilian ore miner, is seen as more domestically focused. Perhaps the most interesting tie-up being mooted is whether Anglo would look at a merger with Rio Tinto.
But any of this would likely be years away, rather than imminent. There is little doubt that the mining deal of the year will, if it comes off, be “Glenstrata”.
