Itochu Mirrors Xstrata in Trader to Miner Move, Seeks Copper

Itochu Seeks Own ‘Xstrata’ in Shift to Mine Developer
The Itochu Corp. headquarters in Tokyo. Photographer: Robert Gilhooly/Bloomberg

Itochu Corp., Japan’s third-biggest trader, is looking for copper mines in the Philippines and the Pacific rim, seeking to transform itself into a mine operator and beat competition for resources from China and India.

“We’re veering in the direction of becoming a mining company,” Satoshi Kondo, the head of Itochu Mineral Resources Development Corp., said in an interview in Tokyo. “We’ve decided on a goal of becoming like Xstrata Plc, gradually building in size.”

Japan’s trading houses, which funded mines operated by the world’s biggest mineral producers through buying minority stakes over the past five decades, are no longer being offered a share in projects as high commodity prices drive record profits for companies such as BHP Billiton Ltd. Asian buyers outlaid $50 billion on mining acquisitions this year, the busiest start for at least 12 years, according to data compiled by Bloomberg.

Itochu’s Kondo said he’s inspired by Xstrata. The Zug, Switzerland-based company built itself through acquisitions to become the world’s largest thermal coal exporter after being split off from its trading company parent in 1999. That parent, now called Glencore International Plc., is seeking to buy back Xstrata in a deal that values the company at 27.6 billion pounds ($43.3 billion).

“If you compare us with Xstrata today it’s like a dwarf and a giant,” said Kondo, who was a mining specialist for the Japanese government for 29 years. “Today, if you want mining assets, you need to go and get them yourself.”

All-Share Deal

Baar, Switzerland-based Glencore, which owns about 34 percent of Xstrata, agreed in February to an all-share combination to create the world’s fourth-biggest miner and cut annual costs by about $500 million.

Kondo joined Itochu Mineral Resources four years ago as its parent trading company sought to create a unit that could invest in metal exploration and hire mining specialists, a move Kondo said was unique among Japan’s traders. Earlier, Itochu would tie up with mining companies including BHP and avoid the technical side of operations, he said.

Kondo’s unit has invested in three deposits, including the Platreef platinum and nickel project of billionaire Robert Friedland’s Ivanplats Ltd. Itochu paid $280 million last year to raise its stake in the South African project to 10 percent from 2 percent.

“In future, we’ll buy companies in their entirety and also aim to work as a mining company in our own right,” Kondo said. “We don’t quite have the manpower now, but we’ll try hard to reach that level, developing mines jointly as a strategic partner and not just a money supplier.”

Bigger Stakes

Mitsubishi Corp. Chief Executive Officer Ken Kobayashi said in April he is no longer interested in buying stakes of less than 10 percent in assets. Japan’s biggest trader paid Anglo American Plc. $5.39 billion for 24.5 percent of a Chilean copper unit in November.

Sojitz Corp. in 2010 became Japan’s first company to run a coal mine in Australia. The Tokyo-based trader is seeking more mines in Australia, Indonesia, Russia and Mongolia and has set up a dedicated unit to manage these operations, Masaaki Bito, the head of Sojitz’s coal unit, said last week.

Sumitomo Corp., the least resource-reliant of Japan’s six major trading companies, took over full ownership of the San Cristobal zinc and silver mine in Bolivia in 2009 after partner Apex Silver Mines Ltd. filed for bankruptcy.

Armed With Cash

Japanese traders, armed with their biggest cash piles in more than 15 years and a strengthening yen, risk becoming financially weaker in trying to mirror the Glencore and Xstrata model, said Benoit Descourtieux, president of OP Investment Management Ltd., which invests in stocks of Japanese traders among other assets. Four of Japan’s top six traders posted record profits last year.

“If they follow Glencore, they may be less attractive or more vulnerable,” Descourtieux said by phone in Hong Kong. “The Japanese are very good at being minority investors. Are they good at being a majority shareholder in foreign firms? It’s going to be a test.”

Marubeni Corp., Japan’s biggest agricultural trader, agreed to pay $3.6 billion in cash and take on $2 billion of debt to buy all of U.S. grain merchandiser Gavilon Group LLC last month ahead of rivals including Glencore and Mitsubishi. The deal was the biggest for Marubeni and prompted Standard & Poor’s to revise Marubeni’s credit outlook to “negative.”

Record Profit

The deal shows that the traders, once the “import engines for corporate-industrial Japan,” are becoming principal owners and operators of assets, said Nobuhisa Ishizuka, partner with Skadden, Arps, Slate, Meagher & Flom LLP, which advised Marubeni Corp. on the Gavilon purchase.

Glencore has dropped 38 percent since its initial public offering in May 2011. Itochu, which has about the same net debt and four times as much cash as the Swiss trader, has declined 6.6 percent in that time to 803 yen at today’s close in Tokyo.

Itochu, Japan’s second-largest trader of iron ore, posted a record profit of 300.5 billion yen ($3.8 billion) in the year ended March 31, overtaking Sumitomo as the nation’s third-largest trading house. Energy and mining profits tripled in the past two years and accounted for 53 percent of earnings.

Itochu Mineral Resources will pursue rare-earth deposits close to generating cash, early-stage copper projects, and platinum group metals, among other minerals, Kondo said.

‘Snatched Up’

“Good assets globally are being snatched up” with competition for advanced-stage copper assets particularly severe, he said.

One way to secure the material that China and India need to feed their growing urbanization is for Itochu to buy into a project at an earlier stage, he said, saying that the Pacific rim, the Philippines and Australia are on his radar.

“It’ll take a while for them to compete with the majors,” said Julie Tay, an investment manager for Asian equities at the Scottish Investment Trust Plc, which manages about $1 billion in assets. “It’ll be some time before this move figures in a significant way on their bottom line.”

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