Dryblower on the doomed Glencore/Xstrata merger

IF THERE is a fresh leg to the boom, the Glencore/Xstrata merger might work, but without it Dryblower reckons the idea of integrating a business that trades coal, oil, soy and cotton with a conventional mining house is doomed to fail.
Dryblower on the doomed Glencore/Xstrata merger Dryblower on the doomed Glencore/Xstrata merger Dryblower on the doomed Glencore/Xstrata merger Dryblower on the doomed Glencore/Xstrata merger Dryblower on the doomed Glencore/Xstrata merger

 

Tim Treadgold

Culture, clarity and quality are the key problems in bringing together two businesses which might have common shareholders, but not much else.

The culture question is the most complex because it touches many aspects of business, including management skills, capital allocation and risk-taking.

Clarity is an easier concept to grasp because it means being open with investors, employees, trading partners and government.

Quality is all about owning the right assets at the right time, something Glencore/Xstrata has not got right, yet.

None of those issues – culture, clarity and quality – is a problem in a boom of the sort seen between 2002 and 2007, when China was on a buying spree and price was a secondary factor to simply obtaining the raw materials to feed its factories.

Back then, the team behind Xstrata got the timing right. By good management or good luck they hit the commodities sweet spot, snapping up bargains such as MIM in Australia and Falconbridge in Canada.

It is possible that the men behind Glencore/Xstrata, Ivan Glasenberg and Mick Davis, will do it again, and that they can see the future more clearly than many others in the mining business, as they did a decade ago.

If that’s the case, then we’re all in for a wonderful time of rising prices, easy capital and long lunches.

One side of Dryblower wishes that their optimism proves correct. The other side is not convinced, for the reasons listed above, which are worth looking at in more detail

Culture

The obvious issue is that Glencore is a world-class commodity trader. It takes risks in buying and selling raw materials and is essentially disinterested in where those commodities come from.

There is nothing wrong with that approach, except when the trader gets caught by a sudden shift in a market, which has just happened in the cotton business, costing Glencore up to $600 million in losses, or when the trader does business with the wrong regime, such as dealing in Iranian oil, which happened to Glencore’s ultimate parent company several decades ago.

Xstrata, however, has to care where it does business.

As a miner it must be must more conscious of risk, both in its mines and it how it allocates capital, because it is much harder to make changes to a mine plan than it is to adjusting exposure to a particular commodity.

Clarity

Glencore is opaque, has always been that way, and will not change.

Its traders want to swim silently through the commodities world, beating rivals to deals and not letting anyone in the outside world know whether it is a buyer or a seller of a particular commodity at a particular time. There’s nothing wrong with that. It’s the nature of the beast.

As a miner in multiple jurisdictions, Xstrata cannot behave like that. It must keep its workforce, stock exchange regulators, and governments fully informed as to what it is doing. Secrecy and openness are totally incompatible concepts.

Quality

Xstrata is a creature of the boom that started a decade ago.

It snapped up a number of assets, but never got the best. It is now heavily exposed to three problem minerals – nickel, aluminium and zinc.

It does not have any iron ore, the boom commodity of the day, or gold, the second boom commodity.

It will rely on its copper and coal to convince investors that it really is a tier one miner when it quite simply is not, and which means it must quickly buy new assets to boost the quality of its portfolio.

So far, most comment and criticism about the proposed Xstrata/Glencore merger has centred on the terms of the deal, and the likelihood that it will trigger a series of similar deals, a point Dryblower picked up last week.

As someone once said, a week is a long time in politics. It is also a long time in business, and the more the Xstrata/Glencore deal is analysed the less appealing it looks.

Investors do not like it, largely because of concern that the terms of the deal favour Glencore.

But once the price is agreed (and the Glencore chaps are very good at getting a deal done) then the rest of the world will take a closer look at a business riddled with contradictions.

This story first appeared on ILN's sister publication MiningNews.net.

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