'Several questions hang over the proposed merger, the main being: Why?' Photo: Jerome Favre
The Xstrata-Glencore merger has put the cat among the pigeons in the mining world.
MINERS are an earthy, pragmatic bunch. Years before the feminist revolution and the sexual liberation of the 1960s, they accepted and embraced the contentious idea that, yes, size does matter.
For decades, mining projects expanded in scale, allowing costs to be spread over a larger area, making marginal prospects economic. The same philosophy was extended to the corporate area.
But in recent years, there have been precious few of those big-ticket takeovers, largely because the industry has been delineated into two distinct camps: the resource giants such as BHP Billiton and Rio Tinto, which have been barred from joining forces because of their size and power, and a gaggle of corporate minnows, largely hopeful explorers and small producers, the best of which are picked off by the majors.
That uneasy truce was shattered this month with the announcement of a multibillion-dollar merger between two Swiss-domiciled, but London-listed, resource powerhouses, Xstrata and Glencore. Suddenly battlelines are being drawn and allegiances called on for support. For the deal put forth threatens to unleash a wave of corporate activity and unsettle the delicate power structure that dominates global mining.
The deal holds particular significance for Australia. Iron ore and coal exports are driving our economy. Xstrata, with massive operations here, has become the world's biggest exporter of thermal coal. And it has ambitions to expand into iron ore, to undercut the duopoly by BHP and Rio Tinto.
Glencore is one of the world's biggest commodity traders. With a 34.8 per cent stake in Xstrata, it long has been portrayed as the puppet master pulling the strings. Glencore is run by Ivan Glasenberg, a former South African junior walking champion and accountant who joined the commodities trader in 1984. He is also an Australian citizen.
Several questions hang over the proposed merger, the main being: Why? There is no doubt the marriage makes sense from an operational view, but why now? After years of secrecy, presumably for tax reasons, Glencore listed on the London Stock Exchange last year. On May 18 this year, the 60 per cent shareholding controlled by Glasenberg and other Glencore executives will vest. From that day on, they will be free to trade the shares.
Getting the deal across the line will be tricky. As an agreed deal by both company's directors, it will be put to a vote by shareholders. Already, several London institutions have voiced opposition, arguing Xstrata shareholders are getting the rough end of the pineapple. Given Glencore will be banned from voting its 34.8 per cent stake in Xstrata - as it is not an independent shareholder - the outcome is anything but certain.
About 38 per cent of Xstrata is owned by global financial institutions that also have sizeable stakes in other resource companies. Many own shares in Glencore. The same institutions also hold positions in the rival miners, particularly BHP Billiton and Rio Tinto. Many are shareholders in Vale.
While those investors are compelled to act in the best interests of their clients and maximise returns, they no doubt will be the subject of lobbying from an array of opposing forces to try to influence the merger outcome.
A great deal is at stake. Xstrata has risen virtually from nowhere in a little over a decade. While its philosophy has been to target lower quality projects than the established majors, it clearly is gearing up to take them head on. Resources are finite but future demand is virtually unlimited. In the space of a decade, they have become incredibly valuable and that trend is likely to continue. The fight over who reaps the spoils has just begun.
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