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Glencore Xstrata tipped to thrive after Davis

David McKay | Wed, 21 Nov 2012 08:15
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[] – IT’S pushing credence to label Mick Davis an early stage entrepreneur, but this is the second time he has been the 'victim' of his own dealmaking.

As with BHP Billiton, a company he was integral in creating with Brian Gilbertson, the fashioning of the Glencore Xstrata superpower is also Davis’s cue to exit. In the meantime, Davis will preside over a company that will be buffeted by head and tailwinds, although the feeling is Glencore Xstrata will excite the world's mining industry as co-architect Ivan Glasenberg intended.

For starters, it will become the target for some feverish buying among investors; in fact, most stockbrokers are urging it.

The group comprises 2.12% of the FTSE 100 Index which, according to Liberum Capital, means it points to additional buying by tracker funds of some £4.1bn, equivalent to 0.29% of the index or 10% of Glencore Xstrata’s share capital.

“We feel many potential investors have waited at the sidelines for the air to clear before pushing the button, however today [November 20] marks a big leap forward in the process and we expect interest in the emerging unique major diversified to intensify from here, “ the stockbroker said.

The combined entity is also viewed positively because it will mark a departure from Xstrata’s cycle of investing in capital intensive projects. “As we have discussed ad naseum in our previous research and again in this note, we consider the long-term investment case for the merged Glencore Xstrata to be compelling,” said analysts from Jeffries & Company.

“We expect the merged company to be intensely focused on maximising returns on capital employed, with a uniquely strong bias to returning capital to shareholders rather than investing in large, capital intensive projects,” it said.

Still, this did not stop Jeffries from indulging in some possibly idle, but highly entertaining speculation.

Based on the fact that Glencore Xstrata expects the merger integration process to take 100 days, the company will be free from the first quarter of next calendar year to scan the horizon for takeover targets with its new balance sheet and fresh asset and geographic mix.

ENRC, First Quantum and even Lonmin were identified as possible takeover targets, but perhaps the most interesting target is the most roadworn: Anglo American.

“Clearly Anglo is vulnerable, with a CEO on the way out, the capex bill at Minas Rio exceeding $8bn, the tail risk in South Africa moving more and more into the centre of the bell, the Zimbabwean government set to sue De Beers, and the share price down nearly 42% from the peak year-to-date,” Jeffries said in a November 20 note.

The deal would also get Glencore Xstrata into iron ore, said Jeffries, before it added: “That said, if things get any worse, the crisis at Anglo could make it uninvestible, rather than an opportunity for Glencore to exploit.”

The headwind, however, is whether it can retain Xstrata staff.

As observed by UBS which said there might be some governance issues for Xstrata Glencore, especially if an exodus of Xstrata executives from the group kicks off. Six of Glencore Xstrata’s 11 board members are from Xstrata. That, however, will be managed.

“We expect the combined group to set up an appropriate incentive programme post-merger for non-directors,” said UBS.

RBC Capital Markets agreed: “Despite the fact that Xstrata proposed pay package were rejected, we think that Glencore will try to retain several of the key Xstrata executives in the merger process,” its analysts said.

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