07/12/2004 - 21:00

Tim Treadgold: Briefcase - Is Xstrata the future of mining?

07/12/2004 - 21:00


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XSTRATA’S low-ball takeover bid for WMC is stirring emotions.

On the one hand there is the garbage argument about how dreadful it is that another Australian corporate icon is falling into foreign hands.

On the other, there is the more thoughtful debate about whether Xstrata is a good company that will bring value to the resources sector, or whether it really is just a financial player without a real understanding of mining.

The answer to this second question is definitely a yes – but having said that it raises an even deeper question as to whether this is such a bad thing, or whether Xstrata is filling a useful function in modernising the mining industry and creating more fertile ground for small companies.

In effect, is Xstrata simply an agent of change, making a fortune for its owners, by doing what corporate raiders have done for decades in other sectors of industry; Sir James Goldsmith, Sir Ron Brierley, Robert Holmes a Court and Jim Slater being examples of earlier raiders who identified under-valued assets in companies with moribund management and ripped them into better shape with some of the left-over pieces forming the basis of new companies – capitalism spawning its young.

To understand the point being made by Briefcase it is important to know precisely what makes Xstrata tick.

Firstly, and critically, it is a 40 per cent-owned subsidiary of Glencore, a Swiss commodities trader with a ruthless reputation.

Secondly, that dominant 40 per cent stake means Xstrata has a very thin shareholder base of about 6,000 investors; miniscule alongside the 67,000 on the Rio Tinto register and 500,000 on the BHP Billiton list.

The capital structure means Xstrata is different. It is not in the mining business for the nobility of digging beautiful holes in the ground. It is in mining to make money, either from trading in assets, or trading in metals.

It is really nothing more than a public face on the ugly brute called Glencore.

For proof, look no further than what Xstrata does about exploration, but be warned because you will need a magnifying glass as exploration appears to be viewed by Mick David, the Xstrata boss, as a complete waste of money. After he acquired MIM one of the first things he did was sell most of the exploration portfolio. If he gets control of WMC expect much of the same thing, which is why some politicians are running around calling Xstrata rude names.

Briefcase, on one level can understand this annoyance because it is assumed big mining companies have big exploration budgets.

But, having taken that as a given there is a contradiction in the assumption because big companies are also universally rubbished for not making the best discoveries; exploration being a line of business best left to smaller companies with their leaner, meaner, riskier, and generally more adventurous approach to work.

This is where Mick Davis has found his magic formula to create value for his shareholders: eliminate the non-value creating cost centres (such as exploration) and focus on what makes the most money, such as digging and delivering coal and copper, or in keeping Glencore awfully well informed so its traders back in Zug, Switzerland, can trade their little heads off.

How can this be good for anybody? Well, with Xstrata we know exactly what we’re getting – an asset trader and metals trader dressed up as a mining company. It is more than happy to leave the business of exploration and discovery to others – thereby creating a marvellous opportunity for small fry to get on with what they do best. If a good discovery is made, that’s when Xstrata does its shopping.

In some ways, Xstrata may even be a glimpse into the future of mining where the two basic functions of exploration and project development/management are completely divorced simply because both sides of the equation have their specialties and neither does the work of the other particularly well.

The only real question is whether value is created for everyone in the game.

Right now it is Xstrata which is getting maximum value because it is the early mover in this newly created space of merciless asset/commodity trading which used to be called mining. It may very well be up to the other big miners to follow because not only is Xstrata creating a cost advantage by not have a big exploration budget, it also has a cost advantage thanks to Switzerland’s low tax base.

Rather than resenting Xstrata’s raid on WMC perhaps it would be wiser to see it as the start of something new in mining, not necessarily a good thing, but certainly a new look at the increasingly globalised world of minerals.




SPEAKING of smart (and nasty) ways of operating a business to create value raises the question about what to do with your Telstra shares now that Ziggy Switkowski has (metaphorically) agree to fall on his sword and depart the big phone company before the Australian Government takes the next step in its complete privatisation.

Briefcase, in the interests of complying with government rules recommends that you should either (a) ignore what is said next or (b) seek psychological and/or potty training, because (c) the government reckons you’re an idiot and can’t be trusted with your own money.

Disclaimers in place: Surely Telstra has to be a screaming buy because this time (thanks to a Senate majority) it really is going to be sold off and this time it really will rip into its bloated cost/manpower structure and deliver the same sort of spectacular cost savings that made the Commonwealth Bank and CSL and Alinta such fabulous investments once the government shackles were cut free.

Time, as ever, is the key but for investors with an attention span longer than 12 months and, let’s face it, anything shorter than that is speculating, Telstra is a ripper just waiting to be cut free – and this time with a chief executive focused on costs rather than bizarre investments in Chinese telephone companies, underwater cables and dot.com basketcases.




"A beautiful woman should break her mirror early." Baltasar Gracian (in 1647).


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