Xstrata open to merger proposal

LONDON -- Xstrata PLC appears receptive to a deal with Glencore International AG or another commodities company but only if it were to add considerable value to Xstrata's shareholders.

Mick Davis, chief executive officer of Xstrata, the Anglo-Swiss mining giant that owns Canadian nickel producer Falconbridge, said his company has received no merger or takeover proposal from Glencore, the world's biggest commodities trader, though it is widely known that they have had discussions about putting the companies together. "We will take any opportunity to create substantial value," he said on Tuesday, as the company unveiled a threefold rise in first-half profit to $2.3-billion (U.S.).

Glencore, led by South African-born trader Ivan Glasenberg, owns 34 per cent of Xstrata. The Swiss-based firm has made it known to investors that it would like to merge with, or buy, Xstrata to create a global mining and trading powerhouse that could compete with the biggest names in the industry - BHP Billiton, Rio Tinto, Anglo American and Vale, the Brazilian company that bought Inco in 2006, shortly after Xstrata bought Falconbridge.

Glencore is said to prefer a premium-free merger of the two companies. Alternatively, it could list its shares on the stock market through an initial public offering, followed by a bid launched at a premium for Xstrata. An IPO would allow the market to put a value on Glencore shares, whose volatile and opaque trading operations are hard to value. Mr. Davis's comment implies he would prefer a takeover offer from a publicly traded Glencore.

Earlier this year, Mr. Davis said Xstrata was "looking at a range of options and possibilities" for its relationship with Glencore. The statement came shortly after Glencore sold a $2.3-billion bond that is convertible into Glencore equity, the presumed first step in transforming Glencore from a private partnership into a listed company. The bond valued Glencore at $35-billion, an amount some analysts think underestimates its true worth by $10-billion to $15-billion.

Analysts think the two companies will get together at some point. Olivia Ker, UBS's director of European mining research, said Xstrata is now in a strong negotiating position because it has staged a remarkable turnaround since 2009 and has ample strength to fund its own projects. "The balance sheet gives them this opportunity," she said. "They don't have to do a deal unless they want to. They would be open to a deal that is value accretive to their shareholders."

Some analysts think Mr. Davis would welcome a merger with Glencore because it would give the enlarged company the heft to pursue large takeovers. Last year, Xstrata proposed a "merger of equals" to Anglo American, which was rejected.

"Ultimately it remains our view that a merger between Xstrata and Anglo American has some strong logic," Sanford C. Bernstein analyst Paul Galloway said in a note on Tuesday. "Xstrata will find it easier to 'go hostile' on Anglo American if it is larger following a merger with Glencore; view Glencore-Xstrata as a stepping stone."

Mr. Davis said Xstrata is no longer considering a bid for Anglo American. Instead, it is focusing on "organic" growth by funding a broad range of new projects in copper, coal and other minerals. The goal is to boost production volumes by 50 per cent by 2014. In the first half, it approved the $4.2-billion Las Bambas copper project in Peru and Australia's $1.1-billion Ulan West coal project.

Xstrata, he said, has approved and implemented 15 growth projects in total, representing a capital investment of $14-billion.

The company said the Canadian division, formerly Falconbridge, generated an operating profit of $86-million in the first half of the year, against a loss of $61-million in the same period a year ago, as copper and nickel prices soared from their post-crisis lows. Xstrata has closed the Kidd Creek copper smelter near Timmins, Ont., but is expanding the Kidd Creek mining operations.