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Glencore completes merger. Now what?

Keywords: Tags  Glencore, Xstrata, merger, Ivan Glasenberg, Steven Kalmin, Claire Hack


LONDON — Given the tight stipulations set out by Chinese and Western regulators, the merger of Glencore International Plc and Xstrata Plc is unlikely to result in an amorphous ravenous beast, as often described in the mainstream media, swallowing up companies and assets at will. So what next for newly merged GlencoreXstrata?

Ever since the merger of the Swiss companies was first mooted, the suggestion has been that the new entity would continue to be acquisitive. The completion of the merger this week was immediately followed by suggestions that the company would look to take over Anglo American Plc.

But the restraints set out by the Chinese Ministry of Commerce, as well as the European Commission and South African authorities, mean GlencoreXstrata is likely to be extremely discerning in choosing new targets.

Having taken almost 18 months to get to this stage, taking on smaller, simpler assets would be less likely to generate controversy and complex integrations.

In a climate of divestment and disposal, there may be a number of potential targets, especially if Xstrata’s Las Bambas copper project in Peru is sold ( amm.com, April 16), as the proceeds would go a long way towards supporting the merged company’s potential plans. This means it is perhaps unlikely that GlencoreXstrata will look to take on major targets, such as Anglo American, immediately.

Analysts have suggested that, with all the complications surrounding Anglo Platinum (Amplats)—or, indeed, any other platinum group metal asset—a move for Anglo would perhaps be unwise, as the unrest among mine workers in South Africa has yet to subside fully, and costs remain high.

Some have said that the issues that dogged Cynthia Carroll’s tenure as chief executive officer at Anglo American would need to be resolved before Glencore-Xstrata could consider making advances for Anglo.

On the other hand, others have mooted the possibility that because of the merged company’s scale, as well as its experience in South Africa, it may be better equipped to take on the challenges associated with Anglo than any other potential suitor. And Anglo is valued mainly on the basis of its impressive international portfolio, excluding South Africa, access to which would no doubt be attractive.

As Rio Tinto Plc continues its program of divesting its aluminum assets, it is possible that GlencoreXstrata could snap up reasonably priced smelters, especially as demand from China and other emerging economies for the light metal continues to rise.
Given Rio’s major writedowns in 2012, GlencoreXstrata would be in a strong position to negotiate with the diversified miner, perhaps even for other assets in its portfolio.

It also has been suggested that GlencoreXstrata could set its sights on some of BHP Billiton Plc’s projects as the latter trims and reshapes its portfolio, potentially putting about 10 non-core assets on the block.

Following Glencore’s acquisition of Vale’s European ferromanganese operations last year ( amm.com, Oct. 4), the merger also could look to build on this with further deals in the alloys sector.

Cost control will continue to be a key theme for chief executive officer Ivan Glasenberg and his deputies. The merged company is expected to focus on keeping operational spending down, while pushing up production and trading volumes to mitigate the effects of volatile commodity prices. Base metal prices in particular have seen peaks and troughs in the past 12 to 18 months, and will require continuous attention to offset the pressure they are likely to put on the business.

All eyes will be on Glasenberg as the sector awaits his next move, but of equal importance will be the actions of chief financial officer Steven Kalmin.

Kalmin spoke of “ample funding” being available after Glencore signed agreements for $12.8 billion in revolving credit facilities in April, but during Glencore’s results presentation for 2012 he also noted a 48-percent drop in metals and minerals adjusted earnings before interest and taxation, citing specifically the fall in nickel, copper and zinc prices.

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