Glencore International Plc (GLEN), the largest publicly traded commodities supplier, said it expects to close the $30 billion takeover of Xstrata Plc (XTA) next month after agreeing with Chinese regulators to sell a Peru copper mine.
The Ministry of Commerce in Beijing yesterday approved the deal, provided the new company disposes of the Las Bambas mine, according to a statement on the ministry’s website. BMO Capital Markets values the asset at $6.5 billion, while Liberum Capital Ltd. estimates it is worth $4.4 billion.
China’s signoff removes the last obstacle to completing the 14-month-old acquisition. Glencore’s largest shareholder and Chief Executive Officer Ivan Glasenberg is poised to create the fourth-biggest mining company by adding coal, copper, nickel and zinc mines to a commodities trading empire. He will run the combined group from its inception, after Xstrata’s Mick Davis yesterday dropped a plan to do the job for six months.
“This seems to me another master-class of Ivan demonstrating why he’s smarter than everybody else,” Paul Gait, an analyst at Sanford C. Bernstein & Co., said by phone. “At the bare minimum, he breaks even on the capex that Xstrata have already sunk on Las Bambas which is arguably already baked into the Xstrata share price.”
Xstrata is building the Las Bambas mine at a cost of $5.2 billion, the Zug, Switzerland-based company said in January. The site is expected to produce 400,000 tons of copper a year starting 2015 for at least the first five years. Xstrata has spent about $2 billion at the site so far, Liberum analyst Ash Lazenby estimates.
China’s scrutiny of the takeover had focused on the combined entity’s influence within the copper market, Glasenberg said last month. Glencore Xstrata Plc will be the world’s third- biggest producer of mined copper.
The concession required by China “is going to be seen as a clear positive for the company and it’s a task that’s very achievable,” Jeff Largey, an analyst at Macquarie Group Ltd. in London, said by phone. “There’s probably a lot of companies out there who could be interested in buying that asset.”
The agreement with China requires Glencore to pursue the sale of Las Bambas to a buyer approved by MOFCOM by Sept. 30 next year. The sale price will be the higher of two scenarios -- either an evaluation by two independent investment banks, or the total of all costs incurred by Glencore and Xstrata at the project, Glencore said.
“MOFCOM have to approve the buyer, so it’s got to be a Chinese state-owned player,” Bernstein’s Gait said. Aluminum Corp. of China Ltd. and China Minmetals Corp. may be interested in the mine, he said.
Should Glencore fail to sell the project, it is required to auction its interest in one of four projects -- Tampakan, Frieda River, El Pachon or Alumbrera -- within three months of Oct. 1, 2014, according to China’s conditions.
Glencore rose 1.3 percent to close at 325.10 pence in London trading yesterday. Xstrata gained 2 percent to 986 pence. The takeover is scheduled to be completed by May 2, with the new shares trading the following day.
Davis, 55, will be paid 4.63 million pounds ($7.1 million) after terminating an October agreement to be CEO of the combined group for six months, Glencore said. He will act as a consultant to the group until June 30, and be entitled to 30 hours of private use of an Xstrata aircraft in lieu of a consultancy fee, Baar, Switzerland-based Glencore said.
Senior Xstrata executives including Charlie Sartain, head of copper, nickel chief Ian Pearce and Loutjie Smit, interim CEO of Xstrata alloys, will leave the company once the deal is completed. Strategy and corporate affairs head Thras Moraitis and chief legal counsel Benny Levene will also depart after acting as consultants for six months, Xstrata said.
“With the majority of the Xstrata executive committee now departing, it leaves the new company with a potentially difficult task of managing a number of complex projects and operations without the existing divisional heads,” BMO Capital Markets analyst Tony Robson said in a note to clients.
Xstrata Chief Financial Officer Trevor Reid said in December he won’t stay on at the combined company, while Chairman John Bond said in November he won’t take on the role at the new group as originally envisaged. Glencore is yet to name Bond’s replacement.
Glencore undertook to supply China with set amounts of copper, zinc and lead concentrate for 8 years starting Jan. 1 this year.
Glencore separately agreed to pay Nyrstar (NYR) NV 44.9 million euros ($55.9 million) to end the commodity trader’s accord to sell Nyrstar’s zinc in Europe. Balen, Belgium-based Nyrstar said it will use the funds to buy Glencore’s stake in the company, a figure equating to 3.39 euros a share.
Billionaire Glasenberg owns about 16 percent of Glencore. He has been CEO since 2002 and worked for the company for 28 years. The takeover comes less than two years after he steered the group through a $10 billion initial public offering that ended more than three decades of operating as a closely held company.
The combined group will be the world’s largest zinc miner and the biggest exporter of power-station coal. Revenue this year will be about $250 billion, Bernstein’s Gait estimates.
The company will have about 11 percent of the 13 million- metric-ton global zinc market and about 40 percent of the 1.9 million tons of the metal produced in Europe, and employ 130,000 people worldwide.
It will have interests in about 35 coal mines in Colombia, Africa and Australia, and make up about 10 percent of global seaborne exports of the fuel.
Glencore has been advised by Citigroup Inc. and Morgan Stanley on the deal. Xstrata hired Goldman Sachs Group Inc., JPMorgan Chase & Co., Deutsche Bank AG and Nomura Bank International Plc. Lazard & Co. advised Qatar Holding.
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