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Posts Tagged ‘culture’

Mining Week 05/’12: Glencore and Xstrata move towards merger

February 5, 2012 Comments off

What is happening with Glencore and Xstrata?

  • For several years Xstrata and Glencore, with over 30% its largest shareholder, have been linked in rumors of mergers. This week both companies released statements to announce that Glencore has now officially started the merger procedure. As a result Glencore is required to come up with an official proposal by early March. However, analysts expect an agreement to be reached much faster.
  • Glencore is the world’s largest commodity trader and also owns operating assets for several commodities, most notably copper, zinc, and coal.
  • Xstrata is the world’s 4th-largest diversified miner, grown rapidly in the past decade by a series of acquisitions.
  • Last year Glencore became a public company, putting an official market value on the company. This step was seen as a requirement to convince Xstrata’s other shareholders to discuss a merger.

Why does a merger make sense?

  • Although the mining industry only very slowly moves in this direction it makes sense to combine raw material production and marketing and processed goods production and marketing in one company. The vertical control over the value chain provides flexibility to react to sudden opportunities in the global marketplace. The 3 pictures below illustrate Glencore’s view of these arbitrage opportunities: geographical, product, and timing arbitrage. The larger the company is and the more overlap between marketing and production, the larger the rationale for merging. Estimated synergies of the Glencore-Xstrata merger are close to $1bln annually, mainly due to increased revenues (whereas most mining related M&A is driven by cost reducing synergies).

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What could go wrong?

Two important things could make the merger fail. The first could even prevent it from happening at all:

  • 1. Antitrust – Glencore is the absolute market leader in trading of various commodities. Any increase of power in these areas would trigger action by antitrust regulators around the world. To get approved, the deal will have to be structured in a way that ensures both supply substitution and demand substitution; i.e. all market parties should be able to get around Glencore-Xstrata as customer or as supplier.
  • 2. Corporate culture – Glencore is a company built on the two-thousand marketeers & traders, while Xstrata is run like a typical conservative mining company. Traders are typically very smart, aggressive, impatient, rational, office-workers. Miners are ‘roll up your sleeves’, ‘move the dirt’, operational guys with only very few of the highly schooled trading-types among them. To make these two groups of people not only work together smoothly, but to integrate the companies so that departmental interests and emotions are fully aligned with the larger companies objectives is going to be a major challenge, in which many employees from both sides might choose to leave the company to find a place where they are more comfortable.

©2012 | Wilfred Visser | thebusinessofmining.com

Symterra: Inmet, Lundin Merger to Forge Copper Mining Giant

January 19, 2011 Comments off

“Inmet Mining Corp.’s planned merger with Lundin Mining Corp. will catapult the combined 9 billion Canadian dollars (US $9.1 billion) miner among the world’s biggest copper producers as demand for the widely used industrial metal shows no signs of easing.

The combined company, to be known as Symterra Corp., will generate annual production of around 500,000 metric tons of copper starting in 2017, up from around an estimated 205,000 metric tons this year, ranking it among world’s top five senior copper producers. Chile’s Antofagasta PLC is the biggest copper producer, with output of more than 600,000 metric tons estimated for this year.

Inmet and Lundin, both based in Toronto, will combine five copper mines in Portugal, Spain, Turkey, Sweden and Finland with two huge copper projects—Inmet’s 80%-owned Cobre Panama operation, one of the world’s largest undeveloped copper projects with a mine life exceeding 30 years, and Lundin’s 24.8% stake in the Tenke Fungurume mine in the Democratic Republic of Congo. The initial phase of that project calls for a 40-year mine.”

Source: Wall Street Journal, January 13 2011

Observations:

  • Although both headquartered in Toronto, Lundin and Inmet don’t have operations in North America. Most of the current production takes place in Europe, with focus of production in the future shifting to Asia, Africa and potentially Latin America.
  • The market capitalization of both firms is roughly equal at $4.4bln. Inmet has demonstrated a stable performance over the past years with profit margin in the range of 25-50%. Lundin has not been as profitable yet, but has access to the promising Tenke Fungurume project.

Implications:

  • The main driver for the merger is combined spending power for the development of Cobre Panama and Fungurume and the dilution of political risk associated with operation in Papua New Guinea and Congo.
  • Analysts point to the difference in corporate cultures of the two companies as a potential obstacle for smooth integration. The composition of the new board, with Inmet’s Jochen Tilk as president & CEO, indicates that Inmet’s ‘corporate citizenship’ culture might become dominant.

©2011 | Wilfred Visser | thebusinessofmining.com

Vale in Canadian strike deal

July 8, 2010 Comments off

“Vale, the Brazilian mining group, has reached a tentative deal with the United Steelworkers union to end a bitter year-long strike by 3,000 workers at its nickel operations in Canada.

The main issue in the dispute has been an annual bonus linked to the nickel price that the union accepted during the 1980s in return for giving up annual wage increases. Pensions and job security were also in dispute. …

The settlement was reached with the help of two government-appointed mediators and announced on Sunday evening local time. Ontario’s labour minister met both sides on Friday.

Details of the five-year settlement were not immediately available. Vale said that it would sign comprehensive agreements with the union on Monday. The deal is still subject to ratification by union members. “

Source: Financial Times, July 5, 2010

Observations:

  • Vale acquired Inco for $17.6bln at the end of 2006. Reports of conflicting management styles, leading to many Inco executives leaving the company, have surfaced since.
  • Vale Inco employees started their strike in July 2009 when Vale wanted to change the bonus payment (which is linked to surging nickel prices) and pension plans.
  • Vale Inco is responsible for approx. 1/3 of Vale’s nickel output. The operations in Sudbury were stopped at a time of oversupply in the nickel market, thus leading to a small nickel price effect.
  • The company has not announced a definite deal with the union yet.

Implications:

  • The strike at the Inco operations has been a serious blow to the revenues of Vale in the past year. Nickel price peaked at almost twice the July 2009 levels in early 2010. Getting the operations in Canada back to full operations was therefore a top priority for Vale’s management team.
  • Vale tried to break the strike in various ways, including operations using contract workers. The company will need to find a balance between improving employee relations and restoring competitiveness of the operations.

©2010 – thebusinessofmining.com