Meeting of mines still in balance


Under normal circumstances, a 42 per cent dive in an FTSE 100 company profits – as demonstrated by Xstrata as it kicked off the miners' earnings season yesterday – would be the talk of the City.

But the vice-like downer that rising costs and tumbling commodity prices are exerting on the miners' bottom lines has been well flagged and, as it happens, Xstrata's $2.45bn (£1.57bn) first-half operating profit was actually better than expected, thanks mainly to making cuts and delaying investment.

Of far greater interest to the City and mining communities alike was what yesterday's results meant for Xstrata's proposed £57bn mega-merger with Glencore, the world's largest commodities trader. To recap, the pair announced plans in February to create a global one-stop mining and commodity trading shop through a merger of equals deal that involved Glencore giving Xstrata investors 2.8 of its shares for each of theirs.

With commodity prices again riding reasonably high after taking a tumble in the second half of 2011, the masters of the resources universe were so confident that the deal would get done that they made it contingent on their top 73 executives getting paid £170m just to stay on for between two and three years after the deal went through – irrespective of its performance. Xstrata chief executive Mick Davis stood to gain £29m all by himself.

The next few weeks proved something of a shock for Mr Davis and Ivan Glasenberg – his opposite number at Glencore – as they hit a wall of opposition with a series of heavyweight investors such as Standard Life and Fidelity speaking out against the deal.

The rebel shareholders complained that the performance-unrelated retention bonuses made it look like senior management was more concerned with lining its pockets than creating value for investors. And they pooh-poohed the claim it was a merger of equals, arguing, in turn, that the 7 per cent premium implied by Glencore's offer was simply not enough.

At first, the two companies held their ground. But when the Qatari sovereign wealth fund – Xstrata's second-biggest shareholder with an 11 per cent stake – added its voice of opposition to a deal that can be voted down by just 16.4 per cent of investors, they finally took note. The companies switched the retention bonuses from cash to shares and introduced a performance element, at the same time as postponing the shareholder vote from July 11 to September 7 to give the changes more time to sink in.

With the vote now looming, much of the City's thinking has seemed to be paralysed on the subject of whether the deal should go through – and on what terms. Against this backdrop, all eyes were on Xstrata's results yesterday as investors sought clues about the chances of the deal being revised – and how.

So what did we learn?

"It's still just incredibly difficult to call," concluded Charles Stanley analyst Tom Gidley-Kitchin. "We really need to wait for the Glencore results [on August 21] to see how its business model stacks up."

Alison Turner at Panmure Gordon added: "I wouldn't think that these results would do anything to change the view of Glencore or indeed the Qataris, except to reinforce the Xstrata proposition as it stands."

So what is the deal's proposition?

Essentially, it is about cutting costs. When they originally announced the deal, Xstrata and Glencore said it would enable them to cut $450m out of their annual costs by combining their sales and marketing operations. They will also seek to find another $300m of cost savings in the two years after the merger by consolidating areas such as transport, distribution and catering, which they should manage because it's what their retention bonuses will be based on.

While Xstrata investors have no beef about the cost-cutting rationale, they are unhappy with the price and a deal looks unlikely to go through at the original price. As Schroders head of equities Richard Buxton put it in February: "Xstrata has higher-quality assets with better growth prospects over the next five to 10 years than Glencore." And that is the view of many.

However, Glencore does potentially have an ace up its sleeve. Because most of its profits come from trading, Glencore can still make handsome profits when commodities are falling – as long as it bets the right way.

While Xstrata is struggling with falling coal, nickel, copper and iron ore prices – and the rising labour and equipment costs that lag a commodity price boom by 12 to 18 months – Glencore could be riding high, giving it the potential to prop up a combined entity during future tough times.

Which is why, as Mr Gidley-Kitchin says, we need to wait until Glencore reports later this month. If it has weathered the commodities storm noticeably better than Xstrata, its investors may become a bit more relaxed about the price. If not, they'll probably remain tense.

While trading profits are notoriously difficult to predict, investors are hopeful that Glencore could announce some decent results later this month. If they do, hostile Xstrata shareholders such as Qatar may reduce their demand that Glencore pays 3.25 shares for each Xstrata one. But it is likely they will still want to see the price increased from 2.8 to, say, 3.0 times.

Glencore appears extremely reluctant to pay any more than it already has – even without the relative outperformance of Xstrata that looks to be needed to soften Xstrata's demands. So the chances of the two sides meeting in the middle looks slim. Just ask the City. Even after yesterday's 13.9p, or 1.6 per cent, rise to 869.9p, Xstrata's shares were still only trading at 2.68 times the value of Glencore's.

Far from implying a deal at an increased price, this suggests no deal at all. But only just, and there will no doubt be a couple more twists and turns yet.

The merger by numbers

Glencore The commodities trading giant is run by Ivan Glasenberg, headquartered in Baar, Switzerland, with a market capitalisation of about £30bn. In 2011, it sold 92.2m tonnes of thermal coal and 20.9m tonnes of grains.

Xstrata The mining giant is run by Mick Davis, heaquartered in Zug, Switzerland, with a market capitalisation of £27bn. In 2011, it produced 83.5m tonnes of coal, 105,925 tonnes of nickel, 517,000 ounces of gold and 92,411 ounces of platinum.

Glenstrata The combined entity would be the world's fourth biggest mining group after BHP Billiton, Rio Tinto and Brazil's Vale. Glencore is already the world's biggest commodities trader. It will be headed by Davis, with Glasenberg acting as deputy.

Premier League Live
footballLIVE Follow all the Premier League action as it happens
The slice of Prince Charles and Princess Diana's wedding cake and the original box from 29 July 1981
newsPiece of Charles and Diana's wedding cake sold at auction in US
Life and Style
3D printed bump keys can access almost any lock
gadgets + echSoftware needs photo of lock and not much more
James Argent from Towie is missing, police say
peopleTV star had been reported missing
Arts and Entertainment
Gregg Wallace in Summer's Supermarket Secrets
tv All of this year's 15 contestants have now been named
i100(and it's got nothing to do with the Great British Bake Off)
Arts and Entertainment
Inside the gallery at Frederick Bremer School in Walthamstow
tvSimon Usborne goes behind the scenes to watch the latest series
Life and Style
A picture taken on January 12, 2011 shows sex shops at the Paris district of Pigalle.
newsThe industry's trade body issued the moratorium on Friday
Arts and Entertainment
Could we see Iain back in the Bake Off tent next week?
tv Contestant teased Newsnight viewers on potential reappearance
Life and Style
Silvia says of her famous creation: 'I never stopped wearing it. Because I like to wear things when they are off the radar'
fashionThe fashion house celebrated fifteen years of the punchy pouch with a weighty tome
ebooksAn evocation of the conflict through the eyes of those who lived through it
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
Mario Balotelli pictured in his Liverpool shirt for the first time
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

DevOps Engineer (Systems Administration, Linux, Shell, Bash)

£50000 per annum: Harrington Starr: DevOps Engineer (Systems Administration, L...

Data Scientist (SQL, PHP, RSPSS, CPLEX, SARS, AI) - London

£60000 - £70000 per annum: Harrington Starr: A prestigious leading professiona...

Financial Technical Consultant (C++, C#, Finance, MSc, PhD)

£50000 per annum: Harrington Starr: Financial Technical Consultant (C++, C#, F...

Data Scientist (SQL,Data mining, data modelling, PHD, AI)

£50000 - £80000 per annum + benefits+bonus+package: Harrington Starr: Data Sci...

Day In a Page

Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

The phoney war is over

Russian troops and armour pour into Ukraine
Potatoes could be off the menu as crop pests threaten UK

Potatoes could be off the menu as crop pests threaten UK

The world’s entire food system is under attack - and Britain is most at risk, according to a new study
Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
From Mozart to Orson Welles: Creative geniuses who peaked too soon

Creative geniuses who peaked too soon

After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
Caught in the crossfire of a cyber Cold War

Caught in the crossfire of a cyber Cold War

Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

Salomé: A head for seduction

Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

British Library celebrates all things Gothic

Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

Is the Hard Rock Café worth fighting for?

The restaurant chain's owners are currently embroiled in a bitter legal dispute
Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

In search of Caribbean soul food

Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
11 best face powders

11 best face powders

Sweep away shiny skin with our pick of the best pressed and loose powder bases
England vs Norway: Roy Hodgson's hands tied by exploding top flight

Roy Hodgson's hands tied by exploding top flight

Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

Di Maria and Ronaldo: A tale of two Manchester United No 7s

They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

Robert Fisk: No victory for Israel despite weeks of devastation

Palestinians have won: they are still in Gaza, and Hamas is still there
Mary Beard writes character reference for Twitter troll who called her a 'slut'

Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

The Cambridge University classicist even wrote the student a character reference
America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

America’s new apartheid

Prosperous white districts are choosing to break away from black cities and go it alone