Dryblower sees the dead hand of government descending

IS this the beginning of a fresh round of global mining industry consolidation, or the end? That’s a question which Dryblower and a few seasoned observers are asking as investors contemplate the possible merger of Xstrata and Anglo American.
Dryblower sees the dead hand of government descending Dryblower sees the dead hand of government descending Dryblower sees the dead hand of government descending Dryblower sees the dead hand of government descending Dryblower sees the dead hand of government descending


Tim Treadgold

But, as the game heats up and new players join in with their takeover moves, it will become a lot clearer that future control of the world’s mining industry is passing from investors to governments.

As that happens, it’s reasonable to expect the mining giants as we know them to collapse into the formless shape of a grey government agency – creating fabulous opportunities for mid-tier and junior miners.

So far, all we have seen is a proposal from Xstrata to create what it calls a “merger of equals” which might appeal to Anglo American’s disillusioned shareholders.

But, behind the scenes, there is a much bigger picture emerging, a glimpse of which was seen in the failed Chinalco deal with Rio Tinto.

That proposal would have effectively seen the Chinese government emerge with a dominant stake in Rio Tinto, and the company become little more than a supplier of choice for China.

The hand of government looms just as large in the proposed Xstrata-Anglo merger, with the South African government wanting to create a “national champion” mining giant based in Johannesburg.

Pressure from the South African government has already been seen in the form of demands that Anglo American appoint a black chairman to better reflect the fact that much of the company’s assets remain in southern Africa, especially its platinum, diamonds, coal and iron ore.

European investors argued that skin colour should have nothing to do with the choice of chairman, while also pointing out that Anglo American is officially London-based, a point that irks South Africa.

Getting Anglo American back under its direct control is an aim of South Africa, and that might be achieved if Xstrata makes such a promise, which seems likely given its curious relationship with the Switzerland-based Glencore commodities group, and a South African chief executive in Mick Davis.

Glencore, which has its own financial worries that include collapsed commodity prices and $US14.5 billion in debt, is completely disinterested in where a merged Xstrata-Anglo is based – even if a move back to South Africa ensures the company falls under the black empowerment rules of that country. This automatically means handing a 26% stake to indigenous investment groups approved by the South African government.

Other players are yet to show their hand in the Xstrata-Anglo deal, but one name mentioned as having a potential future interest is South American iron ore giant, Vale.

That’s when another government comes into play because sitting in the background at Vale is the Brazilian government which holds a “golden share” in the company and loves the idea of Vale as its “national mining champion”

Getting interesting, isn’t it? China tried to snatch control of financially stressed Rio Tinto. Xstrata, which is under as much financial pressure as Anglo American, would be quite willing to orchestrate the creation of a South Africa national champion, and Vale is already under heavy government influence.

If there is a common link in all this it’s the worldwide scramble for control of scarce natural resources.

The most extreme example is the way governments took control of the bulk of the world’s oil industry in the 1960s and 70s, merrily nationalising once independent businesses and then operating under the banner of the Organisation of Petroleum Exporting Countries.

Tough economic times mean that governments are now super-keen to see mining companies focus on job creation inside their borders, or behave in a way that ensures the delivering of cheap raw materials to its factories – which is what China wants.

For investors, the next phase of the constantly evolving mining world will present marvellous share trading opportunities as deal flow accelerates with a full-scale BHP merger with Rio Tinto possibly making a return appearance.

But, once the dust settles, we could easily have the top end of the mining world dominated by government-controlled national champions – opening the way for the rise of second-tier miners that will fill the shoes of the giants as they make decisions that please governments, but not investors.

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