Bloomberg News

Xstrata Profit Slide Hurts Qatari Push for Higher Glencore Bid

July 13, 2012

Qatar is demanding another $4.2 billion from Glencore International Plc (GLEN) for Xstrata Plc (XTA) at the same time that analysts are reducing profit estimates for the Swiss mining company faster than its peers.

Xstrata, due to report first-half earnings on Aug. 7, will post a 39 percent drop in net income for 2012 to $3.5 billion, according to the average of seven estimates compiled by Bloomberg in the past month. The analysts have cut their projections by an average 25 percent, or $1.2 billion, in the last 28 days. Glencore’s profit will fall 2.7 percent for the year, according to six analyst estimates made in that period.

Glencore’s 17 billion-pound ($26 billion) all-share offer was derailed when Qatar’s sovereign wealth fund, the second- largest holder, said last month it wanted the bid raised by 16 percent. Xstrata is the biggest exporter of utility-grade coal. Prices for the fuel “collapsed” in the second quarter, according to Credit Suisse Group AG, slumping about 17 percent.

“The weakness in thermal coal markets this year has been very surprising to most analysts,” said Jeff Largey, a mining analyst at Macquarie Group Ltd. in London. “It makes it harder to justify a bigger premium if it looks like Xstrata’s earnings are the relatively weaker set of the pair. It gives Glencore a better position from a bargaining point of view.”

Qatar Holding LLC, owner of about 11 percent of Xstrata, surprised analysts and investors two weeks ago by calling for this year’s biggest takeover offer to be raised. Glencore has offered 2.8 of its shares for each one in Xstrata, seeking the 66 percent it doesn’t already own.

Xstrata’s Value

An offer at 3.25 “would provide a more appropriate distribution of benefits of the merger whilst properly recognizing the intrinsic stand-alone value of Xstrata,” the Qatar fund said June 26. The fund, advised by Lazard Ltd. (LAZ:US), has built its stake in Zug, Switzerland-based Xstrata at a cost of about $4.3 billion.

Officials for Xstrata, Baar, Switzerland-based Glencore, and Qatar Holding declined to comment.

Xstrata shares traded as high as 2.85 times to Glencore’s in London on March 2. The ratio dipped as low as 2.58 on June 25 and was at 2.67 yesterday.

Fair value for a transaction would be a ratio of 3.4 to 3.8 Glencore shares for each one in Xstrata, Exane BNP Paribas analyst Sylvain Brunet wrote in a report yesterday. Brunet cut his 2012 earnings estimate for Xstrata by 13 percent because of the drop in coal prices.

Qatari Negotiations

“Thermal coal prices are very low at the moment, but it doesn’t mean it’s low in perpetuity,” Andrew Keen, an analyst at HSBC Holdings Plc in London, said by phone. “That’s overplayed by the market. At the moment the Qataris are essentially controlling the vote. The ratio will be really a function of the negotiation between Glencore and Qatar.”

Thermal coal prices at the Australian port of Newcastle, the benchmark for Asia, averaged $95 a ton in the second quarter. That was 23 percent lower than the 2011 average of $123 a ton.

“Concerns about the ongoing problems in the euro zone and the Chinese government’s reduced forecast of economic growth have resulted in deteriorating sentiment,” Xstrata said in a May 31 assessment of its markets, in which it cited declines in metals and coal prices since the start of 2012.

Xstrata will get about a third of its earnings before interest, tax, depreciation and amortization from coal in 2012, according to Macquarie’s Largey, who has cut his 2012 per-share earnings estimate for the company by 17 percent and by 9 percent for 2013. About 42 percent of Ebitda comes from copper, Largey said.

Seaborne Coal

“Xstrata has by far the most exposure to seaborne thermal coal,” Christopher LaFemina and Seth Rosenfeld, London-based Jefferies Group Inc. analysts, said July 9. It derives about 29 percent of its sales from the fuel. “As a result of its high leverage to the seaborne thermal coal price and its relatively high financial leverage, Xstrata has recently suffered very significant mark-to-market earnings downgrades.”

Xstrata advanced 2.8 percent to 846.8 pence yesterday in London. Glencore rose 2.3 percent to 316.65 pence.

Analysts have trimmed their fiscal 2012 net income estimate for BHP Billiton Ltd. (BHP), the world’s biggest mining company, by 3.3 percent in the past month, data compiled by Bloomberg show. Estimates for Rio Tinto Group’s 2012 profit have dropped 8.7 percent.

Glencore and Xstrata have set Sept. 7 as the date for postponed shareholder votes on the deal that were originally scheduled for this week. Qatar’s acceptance is critical to the transaction’s success, given that just 16.48 percent of opposing Xstrata investors can block it.

Ivan Glasenberg

Glencore Chief Executive Officer Ivan Glasenberg, the coal trader turned billionaire mining dealmaker, has so far ignored demands from investors for this year’s biggest takeover offer to be raised. Qatar’s position on the deal is “firm,” Prime Minister Sheikh Hamad bin Jassim bin Jabr al-Thani, who’s also chairman of Qatar Holding, said last week in London.

Activist shareholder Knight Vinke Asset Management LLC on July 3 backed Qatar’s position in seeking an increased offer of 3.25. The New York-based investor said Xstrata assets including the Antapaccay copper mine in Peru, the Koniambo nickel project and the Collahuasi copper expansion are “not yet reflected in the valuation of the company,” it said in a letter.

“It takes extreme long-term forecasts to get to a fair value ratio of 3.25, which is very difficult to justify,” London-based UBS AG analysts Myles Allsop, Ben Davis and Danielle Chigumira wrote in a June 28 report. “Glencore is less likely to increase the exchange ratio if it believes it could attempt to merge again in 12-plus months on better terms.”

Glencore Profit

Glencore reports first-half earnings on Aug. 21. The world’s biggest publicly traded commodities supplier will post net income of $3.9 billion for the full year, according to the average estimate of six analysts compiled by Bloomberg. Analysts who have updated their projections in the past month have cut an average $789 million, or 17 percent, from their estimates, data show. Glencore derives some of its earnings from Xstrata through its 34 percent holding in the mining company.

“Even though metal prices have been under pressure, physical trade flows have still remained relatively strong and that may have allowed them to weather this period of weak commodity prices better than a traditional miner,” Macquarie’s Largey said.

To contact the reporter on this story: Jesse Riseborough in London at jriseborough@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net


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