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The proposed mega-merger of Glencore International PLC and Xstrata PLC will create a global powerhouse with the potential to shake up the mining industry overnight.
If completed, the $90 billion deal will form a mining behemoth with control over one-third of the global market for thermal coal, and make it the world's largest producer of integrated zinc production. It will also rank as the world's third-largest copper producer and fourth-largest nickel producer.
Basically, the merger would create a super-giant that could compete with the industry's heavyweights - BHP Billiton Ltd. (NYSE ADR: BBL), Rio Tinto PLC (NYSE ADR: RIO), and Vale (NYSE ADR: VALE) - the mining industry's "Big Three."
The merger is certain to spark volatility in the sector, according to Money Morning Global Resources Specialist Peter Krauth, an expert in metals and mining stocks who runs the Global Resource Forecast investment service.
"What observers need to understand is consolidation like this concentrates decision making," Krauth said. "The fewer participants in an industry, the more impact they have.
When output is either increased or decreased by one or more mega producers, it will also have a larger impact on world supplies, and therefore prices."
With that kind of power, the Glencore-Xstrata deal will form a goliath with the appetite - and the muscle - to swallow its weaker rivals.
Glencore Xstrata: Hungry for Mergers
Based on estimated 2011 results compiled by Credit Suisse Group AG (NYSE ADR: CS), the new company would have revenue of $211.3 billion and net profit of $7.5 billion. That kind of clout would make its stock valuable currency for more acquisitions.
Plus, both companies are led by aggressive chief executives that have a history of snapping up competitors.
Xstrata has been racking up spectacular growth through acquisitions, although lately it has focused on organic or internal growth to boost production by 50% by 2014.
Glencore, a trader of metals, minerals and oil, has said the main idea behind going public after almost four decades as a private company was to grab acquisitions.
Of course, the new company would have more going for it than sheer size and a forceful management team.
Glencore has a giant global intelligence network of 2,000 employees in about 40 countries. Many of them are traders and marketers that collect extensive data on what commodity buyers want and when.
"Glencore's network makes the CIA look like your grandmother's coffee club," columnist Eric Reguly recently wrote in The Globe & Mail. "It has been adept at forecasting commodity prices based on intimate knowledge of production, demand, regulations, political whims, transport costs and movements everywhere."
Glencore's intelligence network will likely direct it to takeover targets that have iron ore resources, an area where Xstrata currently lacks exposure.
The industry's Big Three control nearly 70% of the one billion-ton annual iron ore seaborne trade, along with contract pricing. Lately they've been dampening prices by flooding the market with iron ore, driving high-cost producers out of the business.
But their mushrooming market shares have triggered more regulatory reviews by concerned governments. That should clear the way for the new Glencore Xstrata entity to target smaller competitors without the Big Three interfering.
Glencore Xstrata Takeover Targets: TCK, AAL, FCX
One takeover candidate is Teck ResourcesLtd. (NYSE: TCK), according to Krauth.
Teck is a $24 billion Canadian-based diversified miner, producing copper, metallurgical coal, zinc, lead and molybdenum, as well as precious metals like silver and gold.
"It's the largest diversified mining company in Canada, the number one producer of metallurgical coal in North America, the number two exporter of met coal in the world and trades at a reasonable price/earnings (P/E) ratio of 10," Krauth noted.
The candidate considered most likely to be targeted is Anglo American PLC, which will be the sixth largest iron ore miner after the merger is completed. Industry insiders have called a Glencore Xstrata takeover of Anglo American "blatantly obvious."
In 2009, Xstrata offered Anglo a no-premium "merger of equals." But Anglo's CEO, Cynthia Carroll, rejected the offer.
With a market cap of $90 billion, Xstrata and Glencore together would be almost 40% bigger than Anglo. That leaves the new Glencore Xstrata company in position to pay a high price and or even launch a hostile bid, if necessary.
Mark Tyler, head of resource financing at Nedbank, told Fox Business that AAL shareholders could push for a deal after a Glencore Xstrata merger, since power in the industry would shift and leave Anglo American struggling for market share.
Finally, even copper giant Freeport McMoRan Copper & Gold Inc. (NYSE: FCX) is considered a takeover candidate. It has heavy exposure to both gold and copper - it expects to produce 3.8 billion pounds of the red metal in 2012 - and both metals should jump in price this year.
FCX, however, is the most expensive of the Glencore Xstrata takeover targets with a $44 billion market value, which could make it too big.
News & Related Story Links:
- Money Morning:
Glencore International, Xstrata Could Make the Next Biggest Deal in Global Commodities
- Money Morning:
Buy, Sell or Hold: Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) is a Mining Play with a Major Upside
- The Globe and Mail:
Xstrata-Glencore deal a possible game changer