Who will head the household?
It is Cynthia versus Mick in the battle for what could become one of the largest mining houses on the globe.
The proposed merger of mining giants Xstrata and Anglo American has been rejected by the Anglo board, local unions and cautioned against by the government, but shareholders may love it.
Five years ago, Anglo American’s market cap was three to five times that of Xstrata, according to one analyst. Today it is only 1.5 times that of its acquisitive Swiss-based counterpart.
Xstrata has a market value of a about £20-billion (R269-billion), with Anglo only a slightly larger £22-billion (R292-billion), despite Anglo’s much larger operations and employee base.
On Wednesday Xstrata released a lengthy statement in response to the Anglo board’s rebuttal, discussing at length the advantages of such a merger. Included was the estimated $1-billion worth of pre-tax synergies that the combined company would have on joining.
It also dealt with concerns around potential job losses that both unions and the government have raised about any possible merger.
The company stated: ‘Xstrata’s synergy estimate does not assume nor envisage any workforce retrenchments at the combined group’s South African operations and Xstrata believes that South Africa would be a net beneficiary of the transaction.”
With concerns about jobs, the government is wary of an entity that could hold a monopoly in the platinum industry. It has tried to eliminate large monolithic structures over the past 15 years, said mineral resources spokesperson Jeremy Michaels.
‘But we are keen to get a better understanding of the proposal,” he said.
Xstrata already has about a 25% share in platinum miner Lonmin, the third largest platinum producer in South Africa. Anglo produces about half of South Africa’s 75% contribution to the global platinum count.
But Xstrata spokesperson Songezo Zibi stressed that Xstrata’s own platinum business (comprising the Motolo and Eland mines) is tiny, with combined production of less than a million ounces. In addition, the stake in Lonmin gives Xstrata no board representation.
‘We are like any other institutional shareholder,” he said.
But he said Xstrata is seeking a meeting with the government to address these concerns.
Carrol, meanwhile, was in South Africa for a meeting with new mining minister Susan Shabangu on Thursday, where the deal, among other things, was to be discussed.
The current price/earnings (PE) ratio for Anglo sits at about 6.6—up slightly from Xstrata’s 5.1, according to Bloomberg data. The ratio gives investors an indication of the value of a share price. A higher ratio suggests expectations of higher growth for the company.
But BHP Billiton’s PE ration outshines them all at 10.6. But the merged entity is widely believed to be Xstrata CEO Mick Davis’ attempt to create a company to rival BHP.
As with most commodities companies, both houses have taken a knock in the global slow down as demand for their goods has plummeted. Both held off on issuing their last dividend in a bid to save cash.
In the statement, Xstrata estimates that the companies combined could create an estimated $17.4-billion in earning before interest and tax.
It could also become the world’s largest producer of export thermal coal, diamonds, zinc, copper and chrome.
In terms of synergies it could reach $458-million through operations, logistics and rationalisation of overlapping activities in coal, copper, zinc and platinum group metals businesses.
It could also see savings of $237-million in streamlining divisional functions and offices, as well as $309-million in streamlined central functions and services, such as exploration, insurance and technology.
There is, however, the question of who will head the household.
Carrol has had a rough ride since taking the helm in 2007. Because she is not from the traditional stable of white, South African men, she was not welcomed to the post.
She did, however, manage to establish good relationships with the South African government, smoothing the way for the company’s new order mining rights.
The tenacious Davis, meanwhile, has been ruthless in building up Xstrata and is seen as the most likely candidate to head the possible new company.