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Mining Week 38/’12: Fortescue in debt trouble; South African shutdowns

September 16, 2012 Comments off

Top Stories of the Week:

  • Fortescue trading halted in prep for announcement
    • Trading in Fortescue’s shares has been halted in preparation of an announcement to be made by Tuesday Sep-18. The company earlier in the week stressed it is in compliance with all its debt covenants, but it is looking to restructure debt as low prices and aggressive expansion investment could result in short-term liquidity problems for the company.
    • Fortescue is a rapidly growing iron ore producer active in Western Australia’s Pilbara region. The company is ramping up to produce 155mn tonnes per year (from a current 60Mtpa), but it has lost 50% of its market value over the past 6 months as investors doubt it will manage to finance the investment plans without sustained high iron ore prices.
    • Sources: Fortescue announcements; Financial Times; The Australian
  • South African trouble spreads beyond Lonmin
    • Anglo Platinum shut down its Rustenburg operations this week as employees showing up for work were intimidated by striking colleagues. In the meantime Lonmin’s Marikana operations are still shut down and Xstrata and GoldFields reduced production in precautionary measures.
    • Despite talks between Lonmin and unions a deal between the striking miners and the company appears to be a long way off. The gap between Lonmin’s wage increase offer and the demands by the unions is over 100%, and the social unrest and promises made by many leaders make it hard for the unions to accept a deal that is much lower than the initial demands.
    • Sources: Financial Times 1; Wall Street Journal; Financial Times 2
  • Glencore’s new offer received positively
    • Glencore released the details of its new offer for takeover of Xstrata. The increased share ration and deal terms appear to win over a sufficient part of Xstrata’s shareholders to make the deal happen. Qatar’s sovereign wealth fund, Xstrata’s 2nd largest shareholders behind Glencore, did not yet respond to the offer.
    • According to the new terms Xstrata’s CEO Mick Davis would have to step down and leave the reign to Glencore’s Ivan Glasenberg within 6 months and the retention package for senior Xstrata managers would stay intact unless Xstrata’s board of directors wants to change it.
    • Sources: Glencore documentation; text; Financial Times

Trends & Implications:

  • Fortescue might suddenly become the focal point of the next big takeover attempt in the mining industry. Share price has decreased dramatically compared to iron ore majors, and both BHP Billiton and Rio Tinto could realize significant synergies with Fortescue’s operations and projects in Western Australia’s Pilbara region.
  • The current low iron ore price has created a situation in which Fortescue’s share price is depressed because operating cash flow does not support the planned combination of investment and debt repayment. Fortescue’s expansion is for a large part finance by debt, loading a company which is worth just over $9bn with over $8bn of debt. BHP Billiton, Rio Tinto, and Vale should all be interested in an acquisition and would be able to get a better deal at debt restructuring because they would pose a lower risk of default to lenders.
  • Caused in part by less potential for economies of scale in transportation than the key competitors, Fortescue operates at clearly higher costs (i.e. lower margins) than Rio and BHP. Quickly realizing cost synergies and aligning the project portfolio with the larger portfolio for the acquiring company would/will be the focus of successful integration.

2012 | Wilfred Visser | thebusinessofmining.com

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Mining Week 37/’12: Glencore increases bid to take over Xstrata

September 8, 2012 Comments off

Top Story of the Week: Glencore takes Xstrata bid hostile

  • Hours before Xstrata’s shareholders were to vote on the proposed merger of equals, Glencore announced it would make a higher bid on different terms . If the vote would have gone on the Qatari sovereign wealth fund would most likely have blocked a deal.
  • The new bid offers 3.05 shares of Glencore for each share of Xstrata, 9% up from the previous bid at 2.80x. In response to the bid Xstrata’s share price went up 8.6% on Friday, with Glencore’s share price dropping 2.9%.
  • Key changes to the previous bid are:
    1. The ‘merger of equals’ will likely change to a plain takeover. As a Xstrata’s shareholders can simply tender their shares and Glencore gains control as soon as it gains a majority of shares (up from the current 35%). Under the former proposed deal approx. two-thirds of Xstrata’s shareholders excluding Glencore would have to vote in favor of a deal.
    2. The initially proposed governance structure with Xstrata’s CEO Mick Davis as the new CEO of the combined company is scrapped and Glencore’s CEO Ivan Glasenberg will take the helm of the new company.

    Official reaction by Xstrata’s independent directors

  • The exact details of the new structure are not yet known, as Glencore is yet to submit the new bid. The implications for the position and potential retention packages for Xstrata’s current top managers and the name of the new company will become clear when the new bid is published.
  • Sources: Financial Times 1 2 3; Wall Street Journal 1 2 3; Reuters; BusinessWeek

Trends & Implications:

  • Facing the likely rejection of the merger bid Glencore had little to lose in changing the terms for the offer. The likelihood of a takeover offer being accepted is much higher than the stakes the merger was going to happen on the proposed terms. Xstrata’s shareholders know that their changes of getting an even better deal than what is offered now are very slim and that they face an immediate drop in Xstrata’s share price if Glencore doesn’t gain control.
  • The offer values Xstrata roughly $4bn higher, but as the company holds 35% of Xstrata already it would cost Glencore approx. $2-3bn extra. If the deal was canceled Xstrata’s share price was likely to lose the roughly 10% in value resulting from Glencore’s bid, amounting to a loss of $1-2bn for Glencore.
  • The sudden governance change to try to make Ivan Glasenberg CEO of the new company is hard to understand. The merger setup was criticized earlier because of the strong focus on keeping Xstrata’s executives on board with generous retention bonuses. Either Glencore’s leadership never really believed they will not be able to achieve the same results as Xstrata’s leadership or they will keep most of the retention controls in place in the new offer.

2012 | Wilfred Visser | thebusinessofmining.com

Mining Week 19/’12: Week of the Investors

May 6, 2012 Comments off

Top Stories of the Week:

  • Xstrata’s investors voice GlenStrata concern
    • In the re-election of Xstrata’s directors the vote against re-election of Ivan Glasenberg, the head of Glencore, increased from 3.6% last year to 13.6% this week.
    • When voting on Glencore’s takeover offer for Xstrata a group of approx. 17% of shareholders could block the deal as 75% of shareholders excluding Glencore’s 33% needs to support the deal.
    • Mr. Glasenberg indicated most of the debate on the merger currently is about the share ratio, which Glencore currently offering 2.8 shares per share of Xstrata.
    • Sources: Financial Times 1; Financial Times 2; Xstrata shareholder meeting results; Xstrata notice on Quatar shareholding
  • BHP Billiton and Rio Tinto return cash rather than invest more
    • Both BHP Billiton and Rio Tinto stressed their commitment to dividend and buyback policies this week.
    • Though reiterating the sustained belief in the long-term growth fundamentals of the commodities markets, the focus of the messages in investor presentations is shifting towards limiting and phasing investment, rather than growing as fast as possible.
    • Sources: Financial Times; BHP Billiton Macquarie presentation; Rio Tinto Asian investors presentation

Trends & Implications:

  • Miners currently focus on returning cash to shareholders because of the combination of short-term cost pressures that make margins shrink and longer term uncertainty about the pace of growth of global demand and the direction of metal prices. Citigroup’s forecast of a falling overall capex (see below in FT’s picture) shows uncertainty about how many of the projects in the current pipeline are really going to make it. Investments in star projects are still done, but the projects that could turn out to be marginal or lossgiving are on hold.

  • Mr. Glasenberg’s comments about the share ratio discussion appear to indicate that Glencore’s bid for Xstrata might be sweetened if the deal runs the risk of not being accepted in Xstrata’s shareholder meeting early July.

©2012 | Wilfred Visser | thebusinessofmining.com

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

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