Bloomberg News

Glencore Mine Deaths Give Xstrata Funds Extra Ratio to Mull

August 31, 2012

Glencore Mine Deaths Give Xstrata Funds Extra Ratio to Mull

The Murrin Murrin nickel and cobalt mining and refining project, a joint venture between Minara Resources Ltd and a subsidiary of Glencore International AG, stands in Western Australia. Source: Glencore International AG via Bloomberg

Xstrata Plc (XTA) investors voting next week on Glencore International Plc (GLEN)’s $32 billion bid are being asked to accept a takeover by a commodities supplier with the highest employee fatality rate among its closest peers.

Glencore, whose 61,000 employees are mostly at mines and industrial sites, reported three deaths for every 10,000 workers in 2011. That’s more than triple the 0.8 rate at Xstrata, the world’s largest exporter of thermal coal. The death ratios were 0.9 and 1.2 at Rio Tinto Group and Anglo American Plc (AAL), respectively, while the biggest mining company BHP Billiton Ltd. reported a 0.2 rate in its 2011 fiscal year.

With Xstrata trading 10 percent below the bid in the year’s biggest takeover, investors who meet Sept. 7 are showing more concern that the deal is not generous enough. Even so, worker deaths can erode image and earnings should the two Swiss companies combine their 101 mines and 25 ore smelters worldwide.

“Poor safety performance can impact on production levels and a company’s ability to generate profits,” said Julie McDowell, head of socially responsible investment at Standard Life Investments. The insurer, which is Scotland’s largest and owns both stocks, declined to say how it will vote.

Qatar Holding LLC, which owns 12 percent of Xstrata, said yesterday it will vote against the bid. The investment arm of Qatar’s sovereign wealth fund said that while it supports the deal in principle, it will reject the merger terms on offer. Knight Vinke Asset Management LLC reiterated its intention to vote against the deal in an e-mailed statement today.

Glencore rose 7.7 percent to 385.05 pence by the close of trading in London, while Xstrata gained 5.7 percent to 952.2 pence. The 24-member FTSE 350 Mining Index advanced 1.6 percent.

Investor Pressure

Mining companies across the world have sought to reduce fatalities, under pressure from investors, governments, labor unions and lobby groups. Aside from a duty of care to employees, mining deaths often result in production stoppages, hurting share prices and curbing earnings growth.

Vedanta Resources Plc (VED), the Indian miner controlled by billionaire Anil Agarwal, slumped 15 percent in the six weeks after May 17 when it reported 22 deaths in the fiscal year through March, compared with a 4 percent decline in London’s FTSE 350 Mining Index.

Fresnillo, the world’s largest primary silver producer, fell about 17 percent in the six weeks after its April 18 output cut, prompted by safety-related slowdowns. The stock also underperformed the benchmark.

Due Diligence

Glencore, based in Baar, Switzerland, trades commodities such as coal and oil and owns mines, factories, tankers and warehouses. The company disclosed 36 employee fatalities in the past two years, four times more than Xstrata. It’s a statistic some advisers to fund managers at the U.K.’s largest investors say should be among factors that determine how to vote.

“We absolutely think these issues should be considered in the due diligence prior to a merger,” said Karina Litvack, head of governance and sustainable investment at F&C Asset Management Plc. (FCAM) The company, which owns both stocks among the $163 billion it controls, wouldn’t comment on how it would vote.

“The obvious question is ‘Are the Xstrata techniques going to be adopted across the Glencore operations?,’ Litvack said. ‘‘We’ll see.’’

The merger statement says Glencore’s mining and processing operations will be fully integrated into Xstrata’s global commodities business, led by existing operational management teams of Zug, Switzerland-based Xstrata.

Glencore, which changed its name after management bought out former U.S. fugitive Marc Rich’s eponymous trading firm in 1994, held a $10 billion initial public offering in May 2011 and has declined 33 percent through Aug. 30 this year.

Further Improvement

Glencore’s death toll in the past two years ranks third behind Kazakhmys Plc (KAZ), which had 56, and Vedanta, where 48 workers died in the past two years. In its fiscal year ending March 2010, Vedanta disclosed 67 deaths.

‘‘Any fatality is unacceptable and avoidable,” said Michael Fahrbach, Glencore’s head of sustainability.

“Glencore has set high global standards for health, safety, environmental and community relations performance under the Glencore Corporate Practice program,” he said. “In many cases, our industrial operations exceed these standards, and have done so in some cases for many years. However, there is clearly room for further improvement.”

Death Investigations

Glencore has begun an assessment of its health and safety and environment practices, which started at its South American metals operations in January, and will be rolled out to other businesses during the rest of the year, it said.

Glencore requires that fatal accidents be examined within 72 hours by a team including independent investigators, with a report sent to the health and safety committee for review, the company said.

“We are in constant dialog with our investors,” Fahrbach said. “We go into very detailed discussions with them on our HSEC performance. Of course, fatalities are also subject of these discussions. They are as concerned as we are.”

“Sometimes companies say ‘What can we do, we operate in a country where life is cheap?’” McDowell said. “They need to move on to a phase where they understand that they have the power to control and influence what happens when people are on their premises.”

By combining with Glencore, Xstrata may dilute a health and safety record that it has been keen to promote.

“Safety is of course a primary concern for our board and management team,” Xstrata Chairman John Bond said at the company’s May shareholder meeting. “Our safety performance ranks among the leading companies in our industry.”

Meeting its sustainability commitments is essential for long-term success and gives Xstrata competitive advantages, the company said in a e-mailed response to questions.

BHP Example

“Working in an environmentally responsible and safe way, and being a good neighbor to communities allows us to successfully operate mines and develop new resources, recruit and retain the best people, sustain capital markets’ support and manage the risks associated with the substantial investments to develop and sustain our operations,” it said.

Juan Salazar, governance and sustainable investment analyst at F&C, said BHP, Rio and Xstrata set examples that others in the industry could follow.

There are “clear commitments from top management and the board on having a good safety performance,” Salazar said of the three companies. “The predominant thing here is the consistent message that runs through the companies.”

Lowest Scores

BHP (BHP), Xstrata and Rio have the highest environment, social and governance disclosure score among the 11 mining companies in the U.K.’s FTSE 100 index, according to data compiled by Bloomberg. Glencore had the second-lowest score, trailed only by Chilean copper producer Antofagasta Plc. (ANTO)

The Bloomberg disclosure measure is an indicator of how transparent companies are, rather than an assessment of their environment, social and governance performances.

Glencore also has the highest employee turnover rate among BHP, Rio, Xstrata and Anglo at 14 percent, the Bloomberg- compiled data show.

Both F&C and Standard Life cite Anglo American CEO Cynthia Carroll as an example of a company leader taking a personal stand to combat health and safety failings.

Carroll, who took over the helm at Anglo in 2007, said that year that its safety performance was “completely unacceptable.” In 2006, Anglo reported 44 fatalities, a figure that dropped to 17 last year.

“Many chief executives make it a personal action point,” said Standard Life’s McDowell. “We’ve seen Cynthia Carroll at Anglo American take a very strong stand.”

Zero Harm

“Despite the improvements in our safety record since 2007, with a significant reduction in the number of our people who have lost their lives at work and lost time injury rates, we have a long way to go to achieve our objective of zero harm but we are determined to get there,” Anglo said in an e-mail.

Glencore reported that 18 people died at its operations last year, without giving further details.

“We expect companies to behave in a moral way,” said F&C’s Litvack. “But that’s not necessarily the argument that’s going to win the day. The argument that does win the day is that ‘We’re worried about the share price if you don’t do this properly.’ We have to gauge the audience.”

To contact the reporters on this story: Thomas Biesheuvel in London at tbiesheuvel@bloomberg.net; Tim Barwell in London at tbarwell@bloomberg.net

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


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