Xstrata rival rejects merger bid
ANDY HOFFMAN


MINING REPORTER

With a $68-billion (U.S.) merger overture to rival miner Anglo American PLCAAUK-Q, Mick Davis, the chief executive of Xstrata PLC, has called a bottom for commodity prices and signalled his company is resuming its aggressive growth plans.


The merger proposal comes less than a year after Mr. Davis's company was rescued from the edge of financial collapse by a controversial stock sale. While Xstrata has enjoyed a dramatic recovery amid a rebound in metals prices this year, Anglo investors have suffered, following a series of missteps by chief executive officer Cynthia Carroll.


Anglo's board of directors roundly rejected Xstrata's proposal of a merger of equals yesterday, deeming it "unattractive for shareholders." Few, however, expect acquiescence from the South Africa-born accountant turned mining executive known as "Big Mick."


"Xstrata may well return with a hostile bid for Anglo," BMO Nesbitt Burns analyst Tony Robson said in a report.


The prospect of an unsolicited bid for London-based Anglo, which boasts a market value of about $36-billion, would cap a remarkable turnaround for Xstrata and its CEO.


Financially stretched from taking on one acquisition too many in the commodities boom, the company was forced to undertake a highly dilutive $5.9-billion rights issue in January to pay down debt. The two-for-one stock sale included a controversial $2-billion agreement by Xstrata to purchase coal assets from its largest shareholder, the secretive Swiss metals firm Glencore International AG. The coal deal is believed to have enabled a cash-strapped Glencore to pay for its share purchase and maintain its 34-per-cent stake in Xstrata, which, like Glencore, is headquartered in Zug, Switzerland.


Regardless, the stock sale put Xstrata back on stable financial footing as metals prices rebounded this spring and spurred a strong recovery in its share price.


It has been a different story for London-based Anglo and Ms. Carroll, a former executive with aluminum giant Alcan in Montreal. Anglo's shares have sharply underperformed those of their peers in the mining sector this year.


Ms. Carroll was credited with shaking up a staid management team when she took over the top job in 2007. But she has come under fire lately for failing to cut costs as much as expected, overpaying for acquisitions - particularly a deal to buy iron ore assets in Brazil - and surprising shareholders by eliminating the company's dividend.


Xstrata has long coveted a deal with Anglo to create a company with the scale to challenge the world's largest miners - BHP Billiton, Rio Tinto and Vale. A serial acquirer whose company has been built on aggressive and savvy deal making, including the hotly-contested acquisition of Falconbridge Ltd. in 2006, Mr. Davis clearly believes the timing is right for Anglo shareholders to consider a combination.


"Without momentum you will go nowhere," Mr. Davis said in a June 9 speech in Toronto.


While Mr. Davis expects he has the momentum needed to get a deal done, Anglo's response to Xstrata's proposal was swift and dismissive.


It said a combination with Xstrata would dilute Anglo American's "unique exposure" to commodities such as platinum, iron ore and diamonds, while burdening its portfolio with less desirable metals such as zinc and nickel.


"Irrespective of this lack of strategic merit, the terms proposed by Xstrata were totally unacceptable," Anglo said in a statement.


If Xstrata does return with a hostile bid, however, the company's deal-making experience may give it the upper hand. Mr. Davis explained Xstrata's acquisition prowess in his recent Toronto address.


ANGLO AMERICAN (AAUK-Q)


Close: $13.45, up 12cents


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A METALS GIANT IN THE MAKING


COPPER


The proposed combination of Xstrata and Anglo American would create the world's No. 1 copper mine producer, with output of 1.579 million tonnes on a 2008 basis, according to industry consultants CRU Group. The combined entity would also be the world's third-largest copper refiner, with 1.033 million tonnes on a 2008 basis.


ZINC


A merged company would be the world's largest zinc-mine producer on a Western world basis, CRU figures suggest. The two companies would have produced a combined 1.316 million tonnes, based on 2008 figures, ahead of Teck Cominco with 663,000 tonnes.


NICKEL


Last year, Xstrata ranked fourth in terms of global nickel-mine output, with Anglo 11th. Based on those figures, a combined entity would move to third place with total output of 135,000 tonnes.


PLATINUM


Anglo owns the world's largest platinum producer, South Africa's Anglo Platinum, which produced about 2.4 million ounces of the precious metal last year. Xstrata is building up its platinum business in South Africa.


OTHER ASSETS


Xstrata says it is the world's largest producer of ferrochrome and a leading producer of primary vanadium. It also says it is the world's largest exporter of thermal coal. Anglo says it is a leading producer of iron ore, manganese and carbon steel. It also produces coal, industrial minerals, and owns 45 per cent of the world's largest diamond producer De Beers.