beyondbrics

By Peter Major

The proposed merger of Glencore and Xstrata will, if it goes ahead, create a new giant of the global mining and metals industry. As one of the world’s largest producers, South Africa needs to consider the merger carefully.

The deal may not affect the man in the street very much, but it does have a strong South African flavour, with both companies having operations in South Africa and both, as it happens, run by South Africans. More importantly, the deal would highlight the role of western investment in mining at a time when there is a strong focus on Asian companies, especially Chinese groups.

Glencore and Xstrata have South African operations which are modest in proportion to their overall assets and revenues.

Glencore is the majority shareholder in South Africa’s Shanduka Coal and handles trading for a few other smaller unlisted South African mines. Xstrata significant partnerships with some larger and listed South African mineral companies – for example with African Rainbow Minerals and Merafe Ferrochrome.

Neither Glencore or Xstrata, which are both based in Switzerland, are listed in South Africa so virtually none of the country’s institutional money is invested in these two companies,.

But there are strong personal connections with Johannesburg as both Glencore and Xstrata are run by South Africans who were the major creators of their companies. Ivan Glasenberg, CEO and largest shareholder in Glencore (worth $9bn+) and Mick Davis, chief executive and founder of Xstrata – were born, raised and schooled in South Africa, and for a time worked in the country.

Davis made his name while still in South Africa – mainly with Eskom, the electricity utility, and as number two to Brian Gilbertson at Billiton, the metals group, that later merged with BHP to form BHP Billiton. Glasenberg’s career took off only after he left South Africa when he rose quickly up the ranks of Glencore from the 1980s onwards.

The two groups are already very close, with Glencore having helped to create Xstrata in 2002 and holding 34.5 per cent. So the impact of the merger on operations – eg through possible job cuts – will be minimal, including in South Africa.

But the combined entity will be a big presence in minerals markets of great importance to South Africa. Glencore is a world- leading commodities trader with significant and rapidly growing mineral operations of its own: some 60 per cent of its estimated 2011 earnings before interest and tax of $3.3bn is from trading, and 40 per cent from mining. Xstrata generates 100 per cent its estimated 2011$31bn revenue and $8bn EBIT from operations.

Combined Glencore and Xstrata would have a market value of $82bn. The company would arguably rival Vitol for the role of ‘world’s largest trading house’. It would have combined forecast 2012 sales of $220bn and net income of over $9bn. The combined entity would be the world’s largest producer of thermal coal, zinc and lead at 12 per cent, 12 per cent and 8 per cent respectively.

This is a world-sized deal creating a world-dominant company with far ranging implications all over the world, including South Africa. This company will rival sovereigns and South Africa’s national budget for the current year is $132bn. So it makes sense for the South African government to become fully abreast of the potential new entity that would result from this merger.

So even though these aren’t companies with big physical operations in South Africa they are in a position to influence the South African economy. It will be right for the South African government and Competition Commission to review any proposed merger in detail.

An official South African review would be a big plus for all South Africans for another reason. It would highlight the presence of a big western investor at a time when many of the country’s largest miners are disinvesting and/or closing up.

Glencore and Xstrata have increased their presence year after year since the early 1990s. And not only have the two companies taken up assets given up by South Africa’s mining houses, but they have helped start up numerous greenfield mining operationsl

And while both companies tend to keep a small public and media image in South Africa, their actions speak louder than their press releases: Glencore and Xstrata clearly plan to stay and grow their businesses in South Africa – and north of South Africa as well (they already have a significant presence in Namibia, the Democratic Republic of the Congo, Zambia, Zimbabwe and Mozambique).

To date, both Glencore and Xstrata have fitted surprisingly well into post-apartheid South Africa. They have both adapted quite easily to the transformation of South Africa’s mineral laws and economy. And even though strikes hit all mining companies in South Africa from time to time – disruptions at Glencore and Xstrata rarely make headlines – only the recent strike at Xstrata’s Merafe ferrochrome operations dragged on long enough to make the nation’s news.

The two groups are striking the right chords with government a time when the whole nation – government, citizens and industry – are desperately keen to attract investment – not least from the developed west.

Glencore and Xstrata bring a welcome counter to the perceptions that Souith Africa has been inundated by ‘Asian’ investment -primarily Chinese and Indian.

Though the actual impact of direct Asian investment in South Africa’s minerals and mining operations is still very limited and much smaller than either Glencore’s or Xstrata’s, the perception in the country, especially for the ‘man in the street’ is otherwise.

A large and growing ‘non-Asian’ mining house in South Africa helps correct the wrong-headed view that the country is being abandoned by the west and taken over by the east.

South Africa wants and needs foreign investment, development and industry. And so -although the country’s authorities should scrutinise the proposed merger – the odds are great that they will approve the deal.

Peter Major is a mining consultant with Cadiz Corporate Solutions

Related reading
Glencore and Xstrata would be ‘unique’, FT
Lex Glencore / Xstrata, FT
How the Glencore and Xstrata merger stacks up, FT interactive