Archives for February 2012

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.