11/09/2012 - 09:03

Analysis: Mining marriages of convenience

11/09/2012 - 09:03


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Spring is a good time to marry. Even mining magnates seem to agree. Ivan and Mick are close to tying the knot in London, and speculation swirls around the marriage of convenience that might see Andrew and Gina walk down the aisle together in Port Hedland.

Amusing as it is to reduce corporate deals to the joining of personalities there is a serious message for Australia in the deals blossoming across the mining world.

Corporate mergers are generally undertaken for one of two reasons; one side of the deal believes bigger is better (and now is a cheap time to acquire assets), or both sides recognise the need to cut costs by sharing services.

The biggest mining marriage, so far, is the plan to create a single business out of the commodities giant Glencore, led by Ivan Glasenberg, with Xstrata, led by Mick Davis, an emerging business unofficially dubbed “GlenStrata”.

The local possibility is a much smaller affair, but one which both parties need, and that’s the cost-cutting benefits of Gina Rinehart and Andrew Forrest, two of Australia’s richest people, enjoying cheaper freight rates from shared iron ore railway and port infrastructure in the Pilbara.

GlenStrata first, because it has attracted more headlines thanks to the theatrics and mating games played by Ivan and Mick, and that largely means the takeover terms offered by Glencore which appear to have settled at an agreeable share-swap ratio, and with Glasenberg snatching the top executive job, albeit over loud protests from Davis.

The merger of Glencore and Xstrata is the resource sector’s good news event because it is very much a business being prepared for the next phase of the resources boom by people who got it right 10 years ago, and who reckon it’s time to get ready for a re-run.

Back in 2002, before most people realised that China’s demand for raw materials would push commodity prices to record highs, Glencore sponsored the creation of Xstrata, initially as a vehicle to buy coal assets, and later as the company to acquire two of the world’s great mining companies, Australia’s Mt Isa Mines (MIM), and Canada’s Falconbridge.

In just a few years the Xstrata tail was wagging the Glencore dog, and even though Glencore retained a controlling 34% stake in its creation Glasenberg this year decided it was time to reel in its spin-off and move to the next stage of his grand plan – to run a resources house that dwarfs every rival, including the current leaders of the pack, Rio Tinto and BHP Billiton.

Glasenberg has made mistakes in the past but he does not often get his timing wrong, which is why his determination to complete the Xstrata merger can be seen as a sign of his belief that the current slowdown in the resources sector will be temporary.

In time, he will add more divisions to GlenStrata to plug some obvious gaps, such as no iron ore operations, an omission potentially accommodated by acquiring one of Australia’s stressed iron ore business, such as Fortescue Metals, or the biggest of them all, Rio Tinto.

Easy to write off as fanciful today, a GlenStrata raid on Rio Tinto should not be dismissed because unless there is a big bounce soon in the iron ore price Rio Tinto management will be facing another crisis with its shareholders of the sort seen in 2008 when the company wasted $40 billion buying the Canadian aluminium producer, Alcan.

The looming iron ore crisis resides in the Rio Tinto revenue streams which are alarmingly skewed towards iron ore. In the half year to June 30, iron ore accounted for 80% of the company’s pre-tax profit, a text-book management situation called “too many eggs in one basket”.

If Glenstrata is being created in preparation for future growth, the possibility of Gina Rinehart and Andrew Forrest doing a deal in the Pilbara iron ore industry is for the other reason mergers occur – cost cutting.

Rinehart is struggling to raise the capital to develop her Roy Hill mine thanks to the low iron ore price and rising costs. Forrest has an existing railway and port system, but is carrying too much debt.

Logically, the two should be talking about shared infrastructure, though the same logic existed a decade ago when BHP Billiton and/or Rio Tinto could have cut their costs by sharing railways and ports.

This time, it could be different because Gina and Andrew need each other, though it is awfully difficult to see the two walking arm-in-arm along the Port Hedland waterfront, no matter how big the savings.


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