Xstrata has stepped up its charm offensive aimed at Anglo American shareholders and analysts in an attempt to persuade them that cost savings alone justify the proposed tie-up between the two, and that a premium for the merger is not necessary.
The Anglo-Swiss mining group hosted a beauty parade of its South African coal and other overseas assets in Johannesburg, aimed chiefly at South African investors, who it concedes are unfamiliar with its operations in the country. Xstrata has proposed a "merger of equals" with Anglo American, saying both companies' assets are complimentary and that a combined group would better avoid the cyclicalities in the industry.
Anglo's board has so far rejected the bid, calling it "totally unacceptable", but it has not yet asked the UK Takeover Panel to force Xstrata to "put up or shut up". This leaves the possibility of a deal hanging.
Xstrata is also pinning its hopes on Anglo's new chairman, Sir John Parker, being persuaded of the merits of a deal as he meets Anglo shareholders. Investors in both groups, particularly those at Black Rock and Capital Group, have argued that significant cost savings could be made from combining the two companies. The case for a merger gained further momentum after analysts at the Japanese investment bank Nomura said a deal could generate savings of as much as £423m a year.
Xstrata admits it is not well known by many South African investors, because, it says, unlike Anglo, it is not listed on the Johannesburg Stock Exchange. A number of South African-based analysts said they had heard little from Xstrata before its bid to merge with Anglo emerged. "It is good to see some interaction from Xstrata. We have had little contact with them since they first started operating in South Africa, but with the Anglo situation, it forces them to be more open now," said one analyst.
Last week's presentation to South African investors, who will be crucial in approving or rejecting Xstrata's approach, focused on the group's coal and copper assets. Concentrating on coal and copper was clearly designed to show investors the proximity of the companies' coal assets in South Africa and copper activities in Latin America. Xstrata has large copper and coal assets, which it argues will recover quicker than Anglo's key platinum and iron-ore reserves.
Anglo also has a strong interest in coal, particularly in South Africa, and argues that Xstrata has in the past declined to take part in proposed joint ventures. Xstrata says this is not true. Any agreement is likely to take a long time to conclude, with news of the tentative approach being leaked before either company was ready two months ago. A deal would also have to overcome Cynthia Carroll's reticence towards a merger deal. The Anglo American chief executive has long argued that the group's shareholders are best served by it remaining independent.
Mick Davis, Xstrata's chief executive, has so far ruled out any prospect of offering a premium to entice Anglo shareholders. However, he has been under pressure to make the case for a merger from some of Xstrata's investors for some time. References to Anglo were conspicuously absent during Xstrata's South Africa briefing, while the group was at pains to highlight its social responsibility agenda, especially its compliance with black empowerment legislation, which forces firms to share assets with disadvantaged communities in the country.
Delegates were shown around the company's Goedgevonden mine, which it expects to produce 6.8 million tonnes of coal when it is completed next year. ARM Holdings, a South African mining firm, owns 51 per cent of the project, although Xstrata has a significant stake in the company.
Both Xstrata and Anglo American have announced first half results in the past two weeks. Last week, Xstrata said that earnings per share in the first six months of the year fell 77 per cent to $1.66, blaming weak commodity prices. Anglo had posted first-half profits down by more than two-thirds.