The potential merger would shake up the mining sector in a similar fashion to the multibillion-dollar combination of BHP and Billiton in 2001, which created the world’s largest mining company by market capitalisation. It might trigger a new round of consolidation in the industry, observers said, forcing other miners such as London-listed Anglo American or Freeport-McMoRan of the US to look for a deal to gain size.
Glencore was instrumental in creating Xstrata. In 2001 it sold coal assets to the then-fledgling Swiss-based mining company, which became the bedrock for Xstrata’s 2002 London flotation. It is also Xstrata’s largest shareholder with a 34 per cent stake. After Xstrata’s IPO, Mr Davis embarked on a dealmaking spree, including the purchase of Canadian nickel producer Falconbridge for more than $23bn in 2006.
Xstrata shares jumped nearly 10 per cent to £12.31, while Glencore rose almost 5 per cent to 452.55p.
Glencore is valued at nearly $45bn while London-listed Xstrata is worth roughly $50bn. After excluding the stake that Glencore already owns in Xstrata, the combined company could be worth more than $80bn.
The combined group would be overwhelmingly a mining company, with just 19 per cent of its 2011 earnings coming from commodities trading, according to an analysis by Credit Suisse. It would control 32 per cent of the internationally-traded market for thermal coal, used to fire power stations, either as a producer or trader. It would also be the world’s largest producer of zinc, with 15 per cent of global production, and the world’s third-largest producer of copper, behind Codelco of Chile and Freeport-McMoRan.
With a market cap of about $78bn, based on Wednesday’s closing prices, it would be the world’s fifth largest listed mining company behind BHP Billiton, Vale, Rio Tinto and China Shenhua Energy. Anglo American, in sixth place, has a market cap of $59bn. Based on Credit Suisse estimates made in October, the company would have revenues of more than $200bn in 2011 and net income of about $9bn.
Commodities bankers have in the past estimated that the combination of the two companies would deliver synergies of about $700m. But some investors remain sceptical of the savings, arguing that the two companies and their strategies are different.
Xstrata is being advised by JPMorgan, Deutsche Bank and Goldman Sachs. Morgan Stanley and Citigroup are advising Glencore.
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