If Xstrata is for sale, shouldn't the market be worried?
Eric Reguly,
From Friday's Globe and Mail
ROME — Mick Davis has been guided by two beliefs since he became CEO of a mishmash of second-rate mining properties called Xstrata PLC in 2001. The first was that commodities were on the verge of a "stronger for longer" - his words - price cycle. The second was that a small number of supergiants would emerge from an unflagging round of buying and selling.
He was dead right. Xstrata profited handsomely from, and was utterly transformed by, both trends. At an investor seminar in London last week, Mr. Davis said Xstrata has gone from a "company of ragtag assets into a world-class operation with world-class assets," one of them being Canadian nickel and copper producer Falconbridge. Xstrata's market value went from the insignificant to the equivalent of $72-billion in the five years since its initial public offering.
More to come? Maybe not, for Mr. Davis's faith in the two trends he so accurately predicted now appears to be waning. This week the company admitted it had held "very preliminary discussions" with rival mining companies on "a range of topics of mutual interest such as industry consolidation." Translation: Xstrata is probably for sale.
Mr. Davis is a smart man. He is one of Britain's best-paid executives. If he wants out, the market had better pay attention.
Let's start with the commodities rally. Since prices took off in earnest in 2002, the rally has defied the wildest dreams of mining bosses and investors. Almost all base metals have doubled, tripled, even quadrupled in price. Copper went from well under $1 a pound (U.S.) to $4 (the price is now about $3). Nickel's rise has been similarly stellar. But rallies always end. No analyst predicts an imminent price collapse, thanks to voracious Chinese and Indian demand. But the chances of a U.S. recession increase by the day as the American housing market softens and the credit crunch triggers heart palpitations among central bankers. Recessions are not kind to commodity prices.
Perhaps Mr. Davis thinks commodities have seen their best gains. In other words, the easy lifting might be over. So why not take the money and run?
Which leads to the second point - the M&A market. Mr. Davis has been portrayed as the ultimate predator, the great white shark of the mining markets. All true; Xstrata has made dozens of acquisitions, ranging from so-called bolt-ons to the 2006 Falconbridge takeover, valued at $22.5-billion (Canadian). But he never bought for the sake of buying. He bought to create value. Proof can be found in the Xstrata share price.
Mr. Davis may be losing his appetite for buying because of the apparently waning commodity price rally and because of inflated target values. In other words, he might be able to create more value for his shareholders by turning Xstrata from predator into prey.
Here's where things could get difficult for him. At Xstrata's size, there are only a small number of possible bidders. Anglo American PLC, the British-South African giant, has a market value equivalent to $88-billion and could muster the firepower. Whether it has the will is another question. Cynthia Carroll, the former Alcan executive who is Anglo's chief executive officer, has been on the job for less than a year and may not have the stomach for a monster acquisition so early in her tenure.
Brazil's Companhia Vale do Rio Doce (CVRD), the owner of Canada's Inco, seems the more likely bidder. CVRD is twice Xstrata's size and the two companies have copper, zinc and nickel properties near each other in North and South America, creating the potential for cost synergies. BHP Billiton Ltd., the world's biggest mining company, is out of the picture, at least for the moment, because it is pursuing third-largest Rio Tinto PLC. China's sovereign wealth funds should not be ruled out, but they're a long shot. They would have trouble managing a company that big.
In other words, the field of possible bidders is far from vast. And any purchaser would have to kiss the ring of Ivan Glasenberg, the chief executive officer of Glencore International, the world's biggest commodities trader and owner of 35 per cent of Xstrata. Glencore has exclusive marketing rights to some of Xstrata's commodities. It's hard to imagine Glencore selling its Xstrata stake unless Xstrata's new owner were to offer Glencore a sweet marketing deal.
Mr. Davis may be feeling trapped. The bold moves and the easy gains have been made. It's a lot more fun to build a company from scratch than to run an established player. Emotionally, he might be ready to leave and he can live like a king on the fortune - estimated at £75-million ($156.4-million) - he has made since the Xstrata IPO. But if one of the savviest guys in the business wants out, other mining executives must be thinking: Why do I want in?