Chinese sniff around Xstrata but unlikely to bite

China’s state-backed miners have looked at Xstrata but are unlikely to bid for it, leaving Brazil’s Vale or Anglo-American best placed to snap up the Anglo-Swiss miner.

Vale, which produces a fifth of the world’s iron ore, said on Monday that it was in talks with Xstrata about a takeover, a deal that analysts said could top $100-billion.

The bid is the latest in a wave of takeovers in the sector, fuelled by commodity prices that have rocketed in the past few years on the back of Chinese demand. Chinese companies are also hunting foreign assets, but they have yet to clinch a major deal.

“If you’re Xstrata you’re going to talk to as many people as possible,” a China-focused investment banker said on Tuesday. “There will be others who are interested and they want to try to smoke those people out.”

He said big Chinese metals and coal companies such as China Shenhua Energy, Yanzhou Coal, Jinchuan Copper, aluminium giant Chinalco and state-owned trader Minmetals were interested in Xstrata.

“It’s not clear whether they can do a deal of this size,” he said.
“It would be possible but I’m not sure that’s how the Chinese would go about doing this.”

Another investment banker said Shenhua and Chinalco’s listed arm Aluminium Corporation of China, also known as Chalco, had looked at Xstrata late last year.

“The Chinese were spoken to some time ago and two of the big Chinese players looked at it. Now it’s moved on,” he said.

Xstrata’s top shareholder is Swiss-based commodity trader Glencore, which holds 34,6% of the stock.

“There’s no way that anyone at Xstrata would talk to anyone unless Glencore told them to,” said the first banker. “Glencore has made some sort of decision that if they can get the right price then they’re probably sellers.

“They will be looking for an equity stake and probably cash as well. That plays into anybody’s hands who’s got cash or who can play with stock. That could be Anglo or Rio Tinto.

“Both Vale and the Chinese deal would have to be all cash.”

Like the Chinese firms, Glencore wants to control the physical commodities it produces, setting up a potential struggle for control if the Chinese firms bought a part share in Xstrata.

That leaves the Chinese well-positioned to play a “cornerstone” role with Glencore after the deal goes through, said the second banker.

As an example, he said Glencore could sell most of its holding in the merged company to Chinese firms before floating the rest, while gaining direct access to China as it has in Russia, where it has stakes in aluminium and oil.

“Glencore has been chatting with the Chinese in the past,” he said. “They’re trying to keep the Chinese warm. And it could be quite advantageous to have some Chinese guys sitting in your foyer when the Vale guys come in.” - Reuters

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