Xstrata set for mega-mergerEmail Print Normal font Large font...

Xstrata set for mega-merger
Email Print Normal font Large font AdvertisementAdvertisementJamie Freed
December 7, 2007

XSTRATA'S chief executive, Mick Davis, says his company is "perfectly positioned" to benefit from an expected new wave of consolidation in the mining industry, sparked by the proposed tie-up of BHP Billiton and Rio Tinto.

His comments come amid mounting speculation the miner is gearing up for a big deal.

"[The BHP offer] certainly has created another new dynamic and momentum for consolidation of the industry," Mr Davis told investors in London. "Whether that transaction will go through or not, time will tell."

There is speculation the miner - after spending the past year pursuing smaller bolt-on purchases such as its $3.1 billion offer for the nickel producer Jubilee Mines and this week's $960 million offer for the NSW coalminer Resource Pacific - is preparing for something much bigger.

The most-touted options are a mega-merger with the London-listed Anglo American (more than $200 billion) or a $9.7 billion cash offer for Zinifex.

Given Xstrata was criticised by analysts for emphasising internal growth opportunities at its half-year results briefing in August, Mr Davis reassured the investment community on Wednesday night that the Anglo-Swiss miner was not about to transform from "being an acquirer of opportunities to a boring builder of mines and facilities".

Historically, Xstrata has made only cash bids, but it would be hard-pressed to fund an all-cash tilt at larger rival Anglo, given its balance sheet and the weakened state of the credit markets. Mr Davis has previously noted his company's British scrip would be a "very valuable acquisition currency" for fellow London-listed miners.

On Wednesday Xstrata's management hinted it could be the smaller partner in its next deal. Mr Davis said Xstrata had "an enormous amount of value to offer any combination". The chief financial officer, Trevor Reid, added Xstrata could be "a consolidator or a consolidatee".

Credit Suisse analysts said a deal between Xstrata and Anglo made sense, but the most value-adding option appeared to be Anglo purchasing Xstrata in a half-cash, half-scrip deal. The analysts said Xstrata's main shareholder, Glencore, might agree to dilute its holding through a merger if Anglo promised it offtake agreements and the Xstrata management team led the combined company.

While the London market focused on the prospect of a mega merger between Xstrata and Anglo American, the Australian market was abuzz with speculation that Xstrata was preparing a $20-a-share offer for Zinifex. Zinifex shares rose 55c to $15.65 yesterday.

Analysts said a bid for Zinifex was logical since Xstrata had vast operations in Mt Isa near Zinifex's flagship Century mine and Dugald River development project. Xstrata would be unable to send the Century offtake to its own smelters because it is promised to Nyrstar for the life of the mine, but Zinifex has yet to sign offtake agreements for the Dugald River concentrate.

Other potential bidders for Zinifex could include Oxiana and Canada's Lundin Mining, but Xstrata has much deeper pockets. An oft-cited potential Zinifex bidder, Teck Cominco, has been trying to diversify away from zinc.

Another target could be Equinox Minerals, which is developing a large copper project in Zambia. Equinox shares rose 75c to $5.49 yesterday on takeover speculation.