Optimum swoop is Glencore at brutal best

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[miningmx.com] — GLENCORE’s enthusiasm for Optimum Coal Holdings would appear to hold no bounds following its purchae of 24.6 million shares late yesterday at R38/share. Initially thought to be the activity of Optimum Coal’s “alternate bid’, alluded to in the coal firm’s announcement to the JSE last week, the shares were in fact a clear demonstration of Glencore pricing out its rivals.

Glencore duly confirmed it would pay a similar level should it convert its “expression of interest’ in Optimum into an outright bid for shares not controlled by empowerment partners. Glencore bought its initial 14.1% foothold in Optimum for roughly R34 per share.

One wonders, however, what Billiton Energy Coal South Africa (Becsa), and Mercuria Energy, both with marketing agreements over Optimum Coal’s output, think of Glencore’s typically aggressive attitude. Certainly there’s not much enthusiasm elsewhere for Glencore’s overtures, not among other coal participants in South Africa.

That’s because a successful bid for Optimum will presumably give Glencore sight of the terms of Becsa’s contract to sell coal from Optimum Coal’s Optimum Collieries. This is the asset BHP Billiton sold to Optimum’s empowerment shareholders in the firm’s first anchor deal.

The same is true of Mercuria’s contract to sell Optimum’s Koornfontein production. As one coal mining CEO commented recently, doesn’t this give Glencore a degree of pricing power over its rivals? And in the context of the highly secretive commodities trading industry, doesn’t this also seem somewhat anti-competitive?

Add to this the fact that Glencore is thought to control the marketing of about 20% of all coal that leaves Richards Bay Coal Terminal, and other ports in South Africa and Mozambique, and it’s clear Glencore’s interest in snapping up Optimum Coal is to strengthen an already tight stranglehold over South African coal.

Said JP Morgan in a recent note: “[I]t [the expression of interest] moves Glencore into an increasingly dominant position in an increasingly deregulated market i.e. in our view, classic Glencore fodder’.

Supporting the notion the interest in Optimum is actually a play for market share, is the fact that amid the current clamour for Optimum shares, it’s easy to forget the company was in some distress.

Until the point when Glencore’s interest in Optimum was established, there was a lot of grumbling regarding the poor price at which Optimum was bound to sell coal to Eskom. In fact, shares in Optimum Coal had fallen 36% between mid-February and early August.

The company was also rejigging its project portfolio and finding ways to raise up to R1bn (which Mike Teke, Optimum Coal says will continue) in an effort to restructure its debt. Optimum has some grotty deals under its belt. For instance, it must sell some coal to Becsa at $87 per tonne for the remainder of the calendar year even though internationally traded coal prices have traded as high as $120/t this year. This will surely have Optimum reporting a derivative loss on that portion of saleable coal for the current financial year.

The view of one offshore asset manager is that the bid for Optimum is “messy’. But then Glencore isn’t afraid to get its hands dirty when its quest for world domination is at stake.

For those who can remember, Glencore’s machinations in securing a piece of Congo copper production was marked in no small degree by aggression. It first eased itself into Katanga Mining and then forced a merger of it with London-listed Nikanor after virtually elbowing its CEO, Jonathan Leslie, out of the way. It was nasty, relatively swift, and brutal business.

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