Responding to press speculation, Anglo American plc confirmed over the weeked it has received a preliminary proposal from Xstrata plc “which may or may not lead to a transaction involving the Group.”
Shortly afterward, Xstrata confirmed that “it recently sent a written proposal to the board of Anglo American seeking their consideration of a merger of equals of the two companies.
Anglo American operations in South America. Red is copper.
Web sources put the value of the merger at $68 billion based on market values, $35 billion for Anglo American and $33 billion for Xstrata.
Anglo American said that “it should be noted that this situation is at a very preliminary stage and that there is no certainty that any transaction will be forthcoming. A further announcement will be made if and when appropriate.”
Anglo American posted detailed disclosure information on the web.
Xstrata said it believes “a merger of these two world-class companies with complementary assets is highly compelling. The combination would create a premier portfolio of operations diversified across multiple commodities and geographies, with enhanced scale and financial flexibility to fund future growth.
“Xstrata has already quantified substantial operational synergies from the combination that are not available to either company operating alone. In addition, Xstrata believes the optimization and reprioritization of the combined company’s organic growth pipelines would significantly enhance shareholder returns.”
Anglo said likely to resist
Reuters quoted a “source close to the situation” as saying that Anglo American is likely to resist the approach by Xstrata. The source said Anglo’s assets are higher quality and have longer lives than those of Xstratra.
With regard to achieving synergies, Anglo American said April 30 it already has taken “a series of proactive measures in response to the current economic environment.”
In its platinum operations, for example, the company said that “a number of cost and value management initiatives were implemented.” By April 30, it had cut employment by 4,195 since December, on the way to eliminating 10,000 positions by the end of 2009. It also said that “good progress was made in the period with the efficiency enhancing operational restructuring” at two of its properties.
Anglo American also cut metallurgical coal production by shutting higher-cost mines in Australia and by “selective restructuring of mining activities at core operations.”
At De Beers, the company reduced diamond production at all its mines through a combination of production holidays and reducing shifts worked, allowing sales from existing inventories in order that sales demand was met.
Synergistic savings put at 2%
Reuters quoted analysts who predicted savings from synergies of $700 million per year, or 2% of combined operating costs, to $875 million a year, which included benefits from putting Anglo assets into Xstrata’s Swiss tax domicile.
It was estimated that Xstrata has offered to pay about a 30% premium for Anglo American. It is assumed that Xstrata would have to sell its 24.9% stake in No. 3 platinum producer Lonmin plc since it’s unlikely that a deal would go through if it added that to Anglo Platinum Ltd., the world’s largest producer.
There is also speculation that if a full merger doesn’t go through, as happened with BHP Billiton and Rio Tinto, the two firms may establish joint ventures in copper and coal similar to what BHP and Rio announced June 5 for their Australian iron ore operations.
Both Anglo American and Xstrata have been building copper empires in South America; each owns a 44% interest in the big Collahuasi mine in Chile.
Potential competition
As is typical when major mining mergers are discussed, there could be competition. One firm that is mentioned is Vale S.A., which attempted last year to acquire Xstrata. It is the world’s largest iron ore producer, but is interested in diversification, as seen from its own efforts in copper and nickel and from its acquisitions, such as that of Inco Ltd. in 2006.
While Vale has some small copper operations in Brazil and Canada, acquisition of Anglo American would make it a world-class player in that arena as well, as it became in nickel through acquisitions. It also would become a major player in coal, platinum and diamonds and would gain far greater geographic diversification.
Vale considers itself the world’s second-largest mining company, with market capitalization of about $90 billion.
Analysts say a wild card in the mix is Glencore International AG, a Swiss commodities trader which owns 35% of Xstrata. There has been speculation in the past week that privately held Glencore has been exploring an initial public offering, taking itself to the market. It is unknown whether this event might be tied to Xstrata’s interest in Anglo America.
