Xstrata hunger for Anglo unabated

Allan Seccombe | Thu, 15 Oct 2009 11:13
[miningmx.com] -- XSTRATA has decided not to make an offer for Anglo American, a decision which could put platinum producer Lonmin in play or another metal producer. Xstrata's actions don't mean that it won't try again in the future.

Xstrata surprised the market in June this year when it said its chief executive Mick Davis had sent a letter to Anglo’s board proposing a nil-premium merger and asking for talks. Anglo almost immediately rejected the overture, saying the proposal took no cognisance of the quality of Anglo’s asset suite.

Anglo approached the UK Takeover Panel to force Xstrata to ‘put up or shut up’ by 20 October. Xstrata decided on the latter course of action but that doesn’t mean Xstrata won’t re-visit the merger again at some point.

“The compelling strategic rationale for a merger of the two companies remains undiminished and has been recognised by shareholders of both companies,” Davis said in a statement, four days ahead of the 20 October deadline.

“We continue to assess a range of alternative growth options, in full recognition that transactions of this nature often take time and patience to mature,” he said.

Davis has argued about the necessity of combining the two groups to be better able to compete in the future with large companies like BHP Billiton for mineral resources and create value. The combined business would have been the largest platinum, diamond, zinc and thermal coal producer and the second biggest source of copper and metallurgical coal.

Anglo was poker-faced about Xstrata’s decision.

“The Board continues to have full confidence in the value inherent within the Group’s unique asset base and the additional value that we can drive from it. I look forward to working with the management team to deliver this value for our shareholders,” Anglo chairman John Parker said in a short statement.

Analysts said it now falls on Anglo to perform after Xstrata's decision which was widely anticipated because of the lack of any premium, something Anglo shareholders wanted despite recognising the merits of the deal.

“We feel the rationale for the deal is strong, but that the hostility with which the Anglo board views Xstrata meant no deal was possible without a material transfer of value from Xstrata to Anglo shareholders,” Liberum Capital said in a note.

“The pressure is now on Sir John Parker to deliver the promised changes at the company. Immediate hurdles are the re-financings of Anglo Platinum and De Beers; resolution of permitting issues at Minas Rio and the delivery of the promised cost savings,” Liberum said.

“Anglo has 12 months to really make good progress on this agenda - as it will be another six months before Xstrata can come again for Anglo and another six months before they could close the deal,” it said.

Anglo cannot afford to fail

Others agreed. Macquarie said in a note: "Anglo cannot afford to fail as Xstrata will be waiting in the wings. This "pressure" should be good for Anglo and its shareholders.

Xstrata's decision could now mean that it will re-examine Lonmin, in which it has a 24.9% stake after it decided to suspend a full takeover bid as the global financial markets collapsed late in 2008.

“It may not be Xstrata’s first choice. Xstrata typically looks for deals where cash flow is accelerating and where the target company can repay much of the investment relatively quickly. I’m not convinced Lonmin entirely fits that bill,” said John Meyer from Fairfax Securities in London.

Lonmin, like its peers, is affected by the very strong rand, which has meant half of South Africa’s platinum operations are running at a loss. Lonmin is also grappling with a turnaround strategy under a new chief executive, who is moving the company away from the strong focus on mechanisation.

The other platinum company with platinum assets near those of Xstrata is Eastern Platinum. Shares in the platinum company have run strongly higher in recent days.

One of the options for Xstrata might be to target a copper producer, which is generating cash. One of the choice options may be First Quantum, with which metals trader Glencore is in a joint venture on a copper project in Zambia. Glencore is a 35% shareholder in Xstrata.

“Xstrata may also just bide its time, they may see metals prices are high and feel that there is potential for the prices to fall back before they make a move,” Meyer said.

The overture from Xstrata has had a positive impact on Anglo, which has become even more focused on delivering value to shareholders and the normally opaque company has, according to some analysts, become a little more open.

The most recent example was an analysts’ visit to Anglo’s South American assets, which included the Los Bronces copper mine in Chile and the Barro Alto nickel project in Brazil and a detailed presentation on the Minas Rio iron ore project.

“The Brazil and Chile site visit likely re-focused the analyst community on the fact that Anglo American is a high quality mine operator and developer, with a stable of top tier assets,” said Des Kilalea, RBC Capital Markets analyst, after the visit.