Xstrata and Anglo: Mega Mining Merger

The Swiss and South African miners could merge in a deal that would create one of the biggest companies in natural resources

By Mark Scott

Editor's Note: This is an updated version of the original posting on June 22.

This year is shaping up as the toughest in recent memory for the global mining industry. The recession has sapped demand from India and China for resources such as copper and iron ore, the core ingredient of steel. That has pulled down commodity prices from their 2008 highs—not to mention whacking revenues, profits, and valuations in the mining sector.

At the same time, many mining companies, especially Anglo-Australian giant Rio Tinto (RTP), are saddled with huge debts after a decade-long merger-and-acquisition binge. The toxic combination of shrinking sales and towering debt has led to major belt-tightening across the sector.

Now comes news that two midsize miners may combine forces—further proof of the scramble to cut costs. On June 22, Swiss mining firm Xstrata (XTA.L) confirmed it had approached South African rival Anglo American (AAL.L) about a potential merger. The deal would create a mining behemoth valued at around $65 billion, with market-leading positions in everything from copper to platinum, which is used in catalytic converters, among other things. The combined company would be among the largest in the industry, directly competing with heavy hitters such as Brazil's Vale (VALE) and Anglo-Australian giant BHP Billiton (BHP).

"Consolidation in the mining sector will be one way for these businesses to remain competitive," says Chris Halliday, head of mining and natural resources at British law firm Eversheds. "The ability to make cost savings will be key to their success."

Late on June 22, Anglo American issued a statement rejecting the proposed merger as "unattractive for Anglo American shareholders" on a strategic basis, adding that "the terms proposed by Xstrata were totally unacceptable."

Renewed Demand

Aside from eliminating redundancy, another rationale to bulk up now is that commodity prices are starting to climb again. Since the start of the year aluminum is up nearly 10%, nickel and zinc prices have jumped roughly 35%, and copper has leapt a staggering 70%. Analysts credit the rebound to the effect of economic stimulus packages, especially in China, that have sparked renewed demand for raw materials. Buyers also are returning to the table after working down inventories that built up during the boom. A merger could leave Xstrata and Anglo American better positioned to take advantage of the upswing.

To be sure, the deal is far from done. Anglo American has rejected the initial approach, and the South African government—a major shareholder in Anglo, which has most of its operations there—also wants to weigh in, according to news agency Bloomberg. Officials fear the proposed tieup could lead to job losses in South Africa. As for Xstrata, Chief Executive Michael "Mick" Davis will need approval from the company's largest shareholder, Swiss metals trader Glencore, before any deal is done. Media reports suggest Glencore would back the merger. The deal may be done entirely in shares or a combination of shares and cash.

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