Mick Davis, CEO, Xstrata
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Xstrata's ambitious Mr. Davis
David McKay
Posted: Tue, 07 Aug 2007

[miningmx.com] -- MICK DAVIS, Xstrata plc’s 49-year-old boss, has the mark of ceaseless ambition writ large upon him. According to one report he puts in a 70-hour week and is most productive after 11pm. For further evidence, just look at Xstrata. In 2001, the company was sinking in $500m of debt. It now has a market capitalisation of $45bn.

Xstrata has come from virtually nowhere. Within six years it currently finds itself jostling for the attention of investors who might previously have selected Rio Tinto, Anglo American or BHP Billiton. While it’s true Xstrata’s share price has been lifted by a buoyant commodity market it’s also worth knowing this is the second time Davis has built a company from scratch.

The first was Billiton, where Davis played the brainy finance director to Brian Gilbertson’s charismatic CEO, although the chitchat has it Davis had more to do with the shift of Gencor’s assets to London than Gilbertson himself. Says Ian Hannam, of JP Morgan, in a report in The Times of London: “There are four people who claim they brought Billiton to London:– Gilbertson, myself, Adrian Coates (head of metals and mining at HSBC) and Davis. The answer is: it was Davis. He saw the opportunity and managed to persuade Gilbertson that it would create a platform to build a new company to rival Rio.”

Davis left Billiton when it became clear the finance position was to be headquartered in Melbourne and not London, as first agreed. Within months he was persuading Swiss group Glencore to allow the coal assets contained in its failed Enex IPO – shortly after 9/11 – to fall to a struggling company in which Glencore had a 40% stake and which Davis would list in London. Xstrata, then close to breaking bank covenants, was reborn.

Growth has been substantially through acquisition. According to a report dated 17 May by Paul Galloway, an analyst at UBS, Xstrata was easily the highest geared firm – at 69% – among all the British miners. Average net:debt gearing of British miners is currently around 21%.

Last year alone Xstrata completed cash acquisitions totalling $19.6bn, including the $17bn takeover of Canadian company Falconbridge. This year it’s made a $5.6bn bid for LionOre Mining and a successful $322m bid for Gloucester Coal, an Australian company.
Davis has the mark of ceaseless ambition writ upon him
It’s also sold its aluminium assets to a private equity firm for $1.15bn in cash, a transaction Davis says was a decision motivated by the assets. “They weren’t of a nature we could build a world-class business.”

The rate of acquisition has had many commentators asking where Davis will strike next. But if it’s shareholder value you’re after it’s not just buying well but operating cheaply. He quotes John Maree, his first boss at South Africa power utility Eskom, and a former chairman: “Think big. See small.”

Xstrata’s London address (the head office has been retained in Zug, Switzerland) is a compact office in a miscible side street off Piccadilly. Only 34 people work in it and at the Zug office. The rest of the company operates from regional offices nearer its mines. And when Davis oversaw the $4.9bn purchase of Australian firm MIM in 2003 the headquarters were slimmed down to 39 from 400.

So when asked a highly speculative question about whether Xstrata would be interested in becoming the mining contractor for the Mmamabula coal deposit – a $6bn-odd private equity investment in Botswana’s best coalfields – Davis claimed to know little of it. Mmamabula is for Xstrata Coal, the division, to figure out. If they fancy it, they’ll bring it to the board.

“I was determined at the start not to populate the head office. I believe firmly that such structures create a competitive tension between the head and regional offices on which has primacy,” Davis says.

Xstrata is the only mining company to have covered its real cost of capital and made more ore payable over the past five years, Davis says. “Assets have value on how much you pay for them and how you then extend the resource’s life and cut costs.” Xstrata outperformed the FTSE all-share mining index by 70% last year.

News flow concerning continuing improvements in newly acquired Falconbridge is, for example, likely to make Xstrata a popular share this year, says John Meyer, an analyst at Numis Securities. Davis hopes to lop off $545m in savings from Falconbridge. Xstrata is Numis’s preferred major mining equity.

In May, Credit Suisse raised the prospect that Xstrata was heading for a major rerating if, as it believed, the nickel price stayed at its elevated levels. Since then, nickel has retreated and Xstrata was outbid for LionOre Mining International by Norilsk Nickel. But that's how a rapidly growing company such as Xstrata is wired: highly geared to the market, both directions. At a nickel price of around $50,000/tonne analysts believe the metal could comprise 30% of group earnings.
I don’t remember government providing tax breaks
So much for nickel. But are there any commodities in which Xstrata considers itself short? Where will “Big Mick´– as the London newspapers have dubbed him – go next? The answer was delivered on August 7: it's platinum.

Platinum drives Xstrata back into Africa, where it already has irons in the fire. One of them is with African Rainbow Minerals (ARM), the empowerment firm listed in Johannesburg. The two companies share a coal company – ARMCoal – that enabled Xstrata to meet empowerment legislation in South Africa. There’s also similar joint ventures in chrome with Merafe Resources and a third empowerment deal in its vanadium assets.

Some companies have tarried, others have fought the legislation. Davis appears to have been unfussy in meeting empowerment legislation. In fact, he expects South Africa’s government may soon grant the company all its mining licences, which is why meeting the legislation was critical.

In an assessment of government legislators, Davis says: “It’s a negative thing to revisit the economics of a project once it’s been built. I don’t remember government providing tax breaks when the mining industry was struggling with a bear market seven or eight years ago.”

Returning to ARM, Davis reckons the two companies could co-operate in African non-coal mining, as laid out in an informal agreement. ARM, through its 64%-owned company TEAL Exploration & Mining, is developing the Konkola North project in Zambia, a project it has declared too big to develop alone. “It could be a productive relationship for both parties,” says Davis. “We’ve found them to be professional. In the right circumstances we’d extend the partnership.”

Andre Wilkens, CEO of ARM, says the companies have been in talks. “There have been a number of discussions about a number of metals. If we find an opportunity no doubt they’ll be other business ventures together.”

The 2006 financial year was a massive earnings one for Xstrata, with attributable earnings before interest and tax more than doubling to $7.8bn. However, just over $6bn of that figure was derived from just two commodities: copper and zinc, the latter infamously volatile.

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Says Davis: “We’re overweight base metals.” Iron ore interests him but he doesn’t favour pushing artificially into the sector and slyly wonders at the $1.15bn Anglo American has paid for a 49% stake in Brazilian Minas Rio, an iron ore producer. “They obviously wanted it, given the price they paid.”

Iron ore also presents major barriers to entry: the cost of railing iron ore from its often remote locations is one. But the commodity is around, Davis notes, and mentions Guinea in West African as a potential hunting ground. But his point is clear. “If we could wave a wand we’d get other revenue streams.”

If Xstrata’s progress seems heady stuff it’s a worthy reminder that commodity markets are in clear ascendancy, driven partly by the increasing cost of production. Davis has few fears of a collapse in metal prices. “ was one of the first people in the industry to say this market was stronger for longer. I do believe the long-term price levels will be higher.” But the supply of metals is slowing, so the market could cool. “Suddenly, everyone’s got religion,” Davis says.