Mick Davis, CEO, Xstrata
Send this article to a friend
Print this page

» Xstrata eyeing bigger things
» Xstrata's ambitious Mr. Davis
» Xstrata offers $1bn for Eland Platinum


Xstrata explains $1bn Eland deal
Michael Coulson
Posted: Fri, 28 Sep 2007

[miningmx.com] -- IT WOULDN'T HAVE SEEMED that way at the time, but in retrospect probably the best thing that happened to Mick Davis was missing out on the top job at Eskom, for which he was eminently qualified.

It impelled him into the mining industry, first with Brian Gilbertson at Gencor, when he was closely involved in the Billiton merger, and then to take the helm at Xstrata when it listed in London in March 2002.

In five years, Davis says, Xstrata's market cap has grown from $500m to $60bn, helped by three major takeovers last year: Falconbridge, Tintaya and one-third of the Cerrejon copper property.

As a result, in broad terms group revenue was $5bn in the first half of 2006, $12bn in the second half and $14bn in the six months to June, so it should top $30bn for 2007 as a whole - and that's without taking any account of its current $1bn (R7.5bn) bid for Eland Platinum.

The Eland bid came just weeks after an announcement that Patrice Motsepe's African Rainbow Minerals and Xstrata Coal are to develop a major new greenfields coal mine - Goedgevonden - at a total investment of R2.9bn. So Davis has by no means abandoned South Africa. He still has a holiday home in Cape Town, visited every Easter and Christmas, and his surprisingly low-key office just off London's Haymarket is adorned with oil paintings by Robert Hodgins and Irma Stern, evidence that his long-standing interest in South African art is as strong as ever.

That word "low key" is vital to understanding the Xstrata philosophy. Davis says the head office, split between London and Switzerland, comprises only 30 people and it houses no geological or engineering capabilities, which are all devolved to the individual businesses. "I don't believe in central services," says Davis.

Nobody gets fired at Xstrata for making a mistake
"Central buying, say, could save money but would destroy value by removing accountability at the operating level. My experiences at Eskom and Gencor/Billiton convinced me that we have to free people from their shackles.

"We operate on a very different model to other resources companies, based on two fundamentals. First, we encourage informal communication across the group at all levels. Second, we must appoint the right people to run the businesses and encourage them to take risks. Nobody gets fired at Xstrata for making a mistake. We all make mistakes. You only get fired for concealing a mistake."

Davis believes that releases huge creative energies and empowers operating management. It was, he says, the management of the chrome division who mooted the bid for Eland.

"Our job at the centre is to explore strategic issues and control central finances. My role is to identify possible transactions, their risks and any red flags. I'm where the buck stops. Assuming that responsibility creates a generally relaxed atmosphere."

In fact, platinum is a business Davis wanted to be in ever since Xstrata listed.

"We could have afforded to buy Impala or Lonmin but I was never satisfied with the entry value. We needed two things: reserves and refining capabilities.

Empowerment unlocked reserves but we'd still only have been contract miners until the acquisition of Falconbridge brought refining capability.

"Then we could look at a project like Eland, which has other attractions. It's scalable - the project size could easily be doubled - and sits near properties owned by people who may be keen on joint ventures."

However, with a project pipeline of $28bn Xstrata now has powerful organic drivers. And Davis has no doubt that the mining industry is experiencing a dramatic and permanent change in its demand profile, with the first real price increases since the post-1945 reconstruction of Europe and Japan.

Click Here to subscribe to our daily newsletter
That follows a 25-year period of declining margins, which stifled exploration and project development as bookkeepers replaced engineers and geologists as the industry decision-takers.

In particular, the "breathtaking" pace of urbanisation in China. "Over the next seven or eight years, 500 million people in South-East Asia will move into cities.

It's a wonderful scenario and with these takeovers we positioned Xstrata to take advantage before anybody else." He does, of course, accept that doesn't mean that metal prices will advance in a straight line. "There must still be cycles."

Given Xstrata's growing position in coal and platinum, is a separate local listing of its South African interests a possibility?

"We see no value in that. We want full control of our cash flow and, as far as empowerment is concerned, we need the right structures that will survive good and bad times."