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The tight stipulations set out by Chinese and Western regulators could mean the merged firm is unlikely to be a ravening beast, swallowing up other huge mining companies. So what next for GlencoreXstrata?
As the biggest merger in the mining sector in recent history finally comes to fruition, the temptation may be to look back at the two companies’ histories, separately and more importantly, in relation to one another.
The threats of revolt from key shareholders, the wrangling over the merger ratio, and the speculation on what would happen if the deal failed grabbed headlines throughout 2012.
Ever since the combination of Glencore and Xstrata was first mooted the suggestion has been that the new entity would continue to be acquisitive.
The completion of the deal was immediately followed by suggestions that the firm would look to take over Anglo American.
But the restraints set out by the Chinese ministry of commerce, as well as the European Commission and the South African authorities, mean GlencoreXstrata is likely to be extremely discerning in choosing new targets.
Having taken almost 18 months to get to this stage, in what must have been an extremely costly and labour-intensive process, taking on smaller, simpler assets would be less likely to generate controversy and complex integrations.
Potential targets
In this climate of divestment and disposal, furthermore, there may be a number of potential targets, especially if Las Bambas is to be sold, as the proceeds will no doubt go a long way towards supporting the merged company’s potential plans.
This means it is perhaps unlikely that GlencoreXstrata will look to take on major targets, such as Anglo American, immediately as was suggested around the time the merger was first announced.
Analysts have suggested that, with all the complications surrounding Anglo Platinum, or indeed any other PGM asset, a move for Anglo would also perhaps be unwise, as the unrest among mine workers in South Africa has yet to subside fully, and costs remain high.
Some have said that the issues that dogged Cynthia Carroll’s tenure at the company, including those linked to the delayed Minas Rio project, would need to be resolved before Glencore-Xstrata could consider making advances for Anglo.
On the other hand, others have mooted the possibility that because of the merged company’s scale, as well as its experience in South Africa, it may be better equipped to take on the challenges associated with Anglo than any other potential suitor.
Glencore’s approach to South Africa as a standalone company has worked well up to this point, and could be applied to Anglo’s assets there, by bringing in new talent to work on ironing out the kinks at Amplats, or at least maintaining the status quo.
It’s worth remembering, furthermore, that Anglo is valued mainly on the basis of its impressive international portfolio, excluding South Africa, access to which would no doubt be attractive.
As Rio Tinto continues its programme of divesting its aluminium assets, it is possible that GlencoreXstrata could snap up reasonably priced smelters, especially as demand from China and other emerging economies for the light metal continues to rise.
Given Rio’s major writedowns in 2012, furthermore, GlencoreXstrata would be in a strong position to negotiate with the diversified miner, perhaps even for other assets in its portfolio.
It has also been suggested that GlencoreXstrata could set its sights on some of BHP Billiton’s projects, as the latter trims and reshapes its portfolio, potentially putting about ten non-core assets on the block.
Following GlencoreXstrata’s acquisition of Vale’s European ferro-manganese operations, completed towards the end of 2012, the merger could also look to build on this with further deals in the alloys space.
Glencore’s capacity to look at small and large assets and stakes across its product portfolio, and to acquire them through a range of means, is exemplified by its acquisition of an option to buy the Jamaican government’s stake in the Jamalco alumina refinery by the end of 2020.
Cost control
Cost control will continue to be a key theme for merger ceo Ivan Glasenberg and his deputies. Glencore’s leading executives, including Glasenberg, will still own a substantial stake in the combined company, meaning that the costs the company bears are the costs they bear.
This, some analysts reckon, means that its attitudes to costs and capital allocation are already at the point that other major mining companies are trying to reach on behalf of their shareholders.
The merged company will focus on keeping operational spending down, while pushing up production and trading volumes to mitigate the effects of volatile commodities prices in the months and years to come.
Base metals prices in particular have seen peaks and troughs in the past 12-18 months, and will require continuous attention to offset the pressure they are likely to put on the business.
All eyes will, of course, be on Glasenberg as the sector and indeed, the world awaits his next move, but of equal, if not greater importance will be the actions of cfo Steven Kalmin.
Kalmin spoke of “ample funding” being available after Glencore signed agreements for revolving credit facilities worth $12.8 billion in April.
However, during Glencore’s results presentation for 2012, he also noted a 48% drop in metals and minerals adjusted earnings before interest and taxation, citing specifically the falls in nickel, copper and zinc prices.
Xstrata also suffered in 2012 as a result of a rocky year in PGMs, with its exceptional items including an $840 million charge on its investment in South African producer Lonmin.
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Claire Hack chack@metalbulletin.com Twitter: @clairehack_mb