Posts Tagged ‘vertical integration’

Xstrata awaits Glencore overtures

April 14, 2011 Comments off

“Xstrata’s silence speaks volumes. The miner is just waiting for a proposal after Ivan Glasenberg, the head of Glencore, made clear that he is gunning for the London-listed multinational, in which the commodities trader owns a 34 per cent stake.

Breaking a decade-long silence, Mr Glasenberg says he sees value in combining Glencore with Xstrata. ‘Why has that not happened? It is a value debate. Xstrata … seems more comfortable for Glencore to go public and get a market price before they may or may not enter into discussions,’ he adds.

In February, Mick Davis, Xstrata chief executive, raised the prospect of a merger too, telling analysts that the prospect of an independently listed Xstrata and Glencore is ‘unsustainable in the long term’.”

Source: Financial Times, April 12 2011


  • Glencore plans to float 20% of the company, worth some $12bln, in an IPO. Current management will retain majority shareholdership.
  • Glencore today announced the composition of its new board of directors, which will include former BP CEO Tony Hayward and former Xstrata CEO Peter Coates.


  • The trend to stronger integration of mining firms and trading firms (the trader’s value chain), which is exemplified by the potential Glencore/Xstrata merger, can also be seen in Chinese Minmetals’ foray into mining by forming MMR earlier and planning to acquire Equinox this month.
  • Now that it appears Glencore will IPO prior to merging with Xstrata, its options to combine the two firms are to buy all other shares of the company, to try to get 50%+ of the shares to enable financial consolidation, or to pursue a real (share exchange) merger. With Xstrata’s current market value of $67bln (and Glencore holding 34% of the shares) gaining control will cost Glencore at least $12bln, with a full takeover costing over $45bln.
  • Glencore will be able to use the $12bln raised in the IPO, could leverage this by taking on more debt, and could issue additional shares in a later stage to raise more capital, but it will likely try to convince Xstrata shareholders to accept Glencore shares as a (partial) payment. In this way the combined company will retain significant firepower to do additional opportunistic acquisitions.

©2011 | Wilfred Visser |

Glencore to reshape board as IPO looms

January 26, 2011 Comments off

“Glencore plans a board shake-up as the world’s largest trading house heads towards a $50bn-$60bn public listing in London in the second quarter of the year. The Swiss-based trading house is talking to many current and former executives in the natural resources world about potential roles as senior non-executive directors for its new board, according to people familiar with the discussions.

Ivan Glasenberg, the South African chief executive of Glencore, recently held talks with Tony Hayward, the former BP chief, about a role as non-executive director in the trading house. Glencore has also held talks with Chip Goodyear, the former chief executive of BHP Billiton, the world’s largest miner by market capitalisation.

Bankers expect Glencore will disclose its plans for a $50bn-$60bn IPO in mid-March, when the trading house reports its annual results. But the trader is keeping its options open and it could still seek a merger with Xstrata, the miner in which it owns a dominant 34 per cent stake.”

Source: Financial Times, January 23 2011


  • Glencore is one of the world’s largest private companies. However, it is experiencing growth problems as it can’t raise money to grow by issuing more equity. Furthermore the company needs to prepare for enormous payouts to top executives leaving the firm, which could cause liquidity problems. Going public would solve these problems.
  • The trading house, owning large stakes of various mining companies, showed strong profit growth for Q3 of last year, mainly driven by booming agricultural commodity prices.


  • Most likely Glencore will have to perform an IPO before it can merge with Xstrata, as this is the easiest way to figure out the value of the company. Estimates of valuation of the company are based on a bond it issued at the end of 2009 and on industry multiples (PER of 14-18).
  • Various insiders question the probability of success of a merger with Xstrata, as the corporate cultures of the extremely results-driven trading house and the more relaxed mining house could clash. A merger between the two companies would produce the first fully vertically integrated natural resources major, which could open the door to new ways of negotiating with clients and new types of contracts.

©2011 | Wilfred Visser |

Baosteel and China Steel in iron ore move

November 17, 2010 1 comment

“Taiwan’s China Steel and China’s Baosteel are planning to invest jointly in overseas iron ore mines. …

The co-operation also highlights the pressures that volatile iron ore prices impose on mid-sized steel mills. In recent months, this has led to a number of iron ore mine acquisitions by steel companies, as well as a new pricing system for iron ore this year.

Tsou Jo-chi, China Steel chairman, has previously said he hoped to increase his company’s self-sufficiency in iron ore from 2 per cent to 30 per cent within five years. China Steel uses about 20m tonnes of iron ore a year.”

Source: Financial Times, November 17 2010


  • China Steel’s 30% self-sufficiency for 20m tonnes iron ore content requires the company to gain control over approx. 6Mt mine production. This is approx. 0.3-0.4% of global production.
  • Recent Chinese steel maker’s investments in mining capacity abroad include Shandong’s investment in Sierra Leone Tonkolili mine and Wuhan’s joint venture with Australian Centrex Metals Ltd corporation.


  • Upward vertical integration by steel makers will increase due to the increased risk for the downstream business of the new iron ore pricing system. However, as the Chinese steel makers don’t have the expertise to operate the iron ore mines, they will typically need to look for investments with a western operating partner.
  • Analysts suggests the companies are partnering in order to have a stronger financial position for acquisitions. This implies they will not be looking for many small acquisitions, but rather for 1-3 major operations.

©2010 | Wilfred Visser |

Australian miners bid for coal rail network

May 31, 2010 Comments off

“A consortium representing many of the world’s biggest iron ore and coal miners has made a pre-emptive strike to buy the Australian state of Queensland’s coal rail freight network with a fully funded bid worth A$4.9bn (US$4bn).

The 13-member consortium – which includes BHP Billiton, Rio Tinto, Anglo American, Brazil’s Vale and Peabody Energy of the US – is trying to head off the state government’s plans for a 2010 initial public offering of QR National.

QR National – a business that includes coal and other freight networks, rolling stock, and a coal logistics business – plans to raise between A$2bn to A$3bn in a float that would give it a market value of about A$7bn.”

Source: Financial Times, May 26 2010


  • Many parties see the offer as the best option for the government. Queensland Resource Council says: “With uncertainty hanging over the world’s stock markets, the State has been given a gilt-edged opportunity to reconfigure its QR National asset sale plans while underpinning the future growth of its leading export industry.”
  • The offer of the consortium gives the government a 60%+ premium vs. an IPO. However, they will be left with a part of the company that will be harder to operate and sell.


  • With this “offer the government can’t reject” the miners try to secure stable and cheap transportation from the mines to the ports. Problems might surface when new investments that specifically favour one of the consortium members need to be made to the network.
  • The offer can be seen as part of the trend of downward vertical integration in the mining industry. Vale currently is the best example of a miner with large assets in transportation (Brazilian rail network). Potentially, if shipping tariffs become a bottleneck, miners will start investing in seaborne bulk transport as well.

Vertical integration in mining: the trader’s value chain

May 21, 2010 3 comments

Vertical integration has been a significant driver of acquisitions in the mining industry in the past decades. As steelmakers and other mineral processers were trying to secure supply of resources, they increasingly decided to buy mines and mining companies. The next decade will show another interesting development. The vertical integration will increasingly include the next step in the value chain: trading.

Vertical integration in mining

The looming merger of Glencore and Xstrata will create the first of a new type of companies. The integrated mining, processing and trading companies will span the entire value chain of the resource world. This development is not unique. In many other industries the drive to become more customer-centric has resulted in similar moves.

The fact that a large part of the global resource production never enters the global trade and the nature of commodity markets, in which price is the key differentiator, has made the development in mining and metals slower than elsewhere. Furthermore, there is a large difference between the corporate cultures of the trading houses and the large mining companies.

Why integration?
Now why would the resource producers want to merge with traders? What synergies will be achieved in such a combination? The key of the answer is improvement of supplier power. A significant cost reduction and productivity improvement will be achieved by eliminating the trading department of the resource company after transferring the crucial activities to the trading house. However, most money will be made because of improved trading terms.

An exiting additional benefit in the long term could be that mines are going to produce on demand and just in time. If customer A in Japan sends its specified needs to the traders, the next step should be to translate the order into a production schedule for the mine and plant.

Consequences for mining
What will the integration along the value chain imply for miners? First of all they will slowly be forced to think more about the customer and less about the technology. Secondly, the production schedules will need to become more flexible in order to be able to deliver what is demanded. Finally, as the new company will be able to better respond to changes in commodity prices, more mines will start aligning their output volume with demand. In the extreme case this will mean that more mines will temporarily be shut down or sleeping mines temporarily opened again.

Concluding: Mining will become more flexible. Vertical integration including trading houses will not cause a revolution in the industry, but it will change priorities and slowly make the mining industry a more customer-centric environment.