Xstrata bid to spur rush for scarce opportunities

Bloomberg

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Xstrata’s proposed 24 billion-pound ($40 billion) merger with Anglo American may spur competing bids from Brazil and China as rival miners vie for a deal to place them among the largest producers.

The Xstrata merger is the largest proposed transaction since BHP Billiton, the industry’s biggest company, abandoned its hostile bid for Rio Tinto Group in November 2008.

Analysts and investors say Brazil’s Vale, the biggest iron ore producer, and state-owned Aluminum Corp. of China may also consider acquisitions.

Xstrata and Anglo are the last remaining diversified mining groups that would allow an acquirer to compete with BHP, Rio and Vale through a single acquisition.

Mining executives and investors are seeking further consolidation in the industry, creating conglomerates that can make economies of scale and be better able to influence commodity prices. "There are relatively few chess pieces left on the board," said Nick Hatch, an analyst at ING Groep in London.

Xstrata said June 24 a "merger of equals" would save more than $1 billion annually by the third year following the deal. Mick Davis, the Zug, Switzerland-based company’s chief executive officer, plans to make savings by combining adjacent mining operations in South America, South Africa and Australia. Xstrata published details of the plan after it was rejected by Anglo. Anglo stocks have declined 46 percent in the past year, giving it a market value of 24 billion pounds. Xstrata is valued at 20 billion pounds. BHP agreed earlier this month to pay Rio $5.8 billion to form an iron ore joint venture in Western Australia that may save more than $10 billion. The value of mining M&A peaked at $596.8 billion in 2007, according to data compiled by Bloomberg, before collapsing as plunging commodities and the credit crisis curbed funding for deals. While transactions totaled just $122.5 billion in the first half of this year, metal prices have rebounded on predictions of a global economic recovery.

Copper has risen 64 percent in London this year, nickel has gained 35 percent and zinc 31 percent.

Pressure on global mining firms to cut down costs

"We are seeing more transactions now. It’s typical for this stage of the cycle," said Barend Ritter, a fund manager at Sanlam Investment Management in Cape Town who helps oversee 250 billion rand ($32 billion) of assets including Anglo stock. "There is pressure on mining companies to take out costs."

Vale, which abandoned talks to acquire Xstrata in April last year, is a possible alternative suitor to Anglo, said Alexander Hacking, an analyst in New York at Citigroup.

"Vale does not necessarily need to do something, but if they want to move out from under the wings of the Brazilian government and be truly global, they may have to," Hatch said.

A move by Vale to buy Anglo or Xstrata would be risky after the global economic contraction damped demand for iron ore, said Will Landers, a senior portfolio manager for Latin America at Blackrock. "We’re not completely out of the woods yet, and a transaction of this size would bring a lot of complications," said Landers. Blackrock is the biggest holder of preferred stock in Bradespar, which, through investor Valepar, is one of Vale’s controlling shareholders.

Vale isn’t currently planning any kind of acquisition, Chief Executive Officer Roger Agnelli said June 25. Any takeover talk is "market speculation," he said.

China, the largest consumer of industrial metals and coal, is also still hunting for access to natural resources. State-owned China Minmetals Group received approval two weeks ago from shareholders of OZ Minerals to buy $1.39 billion of mining assets from the Australian company. Aluminum Corp. of China, also known as Chinalco, planned to invest $19.5 billion in Rio until its accord was scrapped.

"I’m sure Chinalco or the Chinese remain interested in acquiring access to natural resources, especially on the heels of Rio’s rejection," said Niall Paul, chief investment officer at Aviva Investors in London.

Russia too has been pushing for a merger. Prime Minister Vladimir Putin voiced support for a combination of the country’s metals companies in January. Billionaire Mikhail Prokhorov, who owns a stake in Russian aluminum producer United Co. Rusal, said June 5 he wanted the company and Norilsk Nickel to form a rival to BHP.

Investors and analysts are predicting a backlog of shelved takeovers may now go ahead as metal prices recover. Most metal markets still remain "fragmented and ripe for further consolidation." said Paul Cliff, an analyst at Nomura Securities in London.

"The quest for diversification, scale and a portfolio of low-cost, long-life, expandable assets remains intact," Cliff said.