Mining Journal > Finance > Glencore to buy back Prodeco from Xstrata

Finance

Glencore International AG will buy back Colombian coal unit Prodeco from Xstrata plc, setting the stage for an initial public offering that may value the trading company at US$35 billion.

Glencore, which had until yesterday to exercise an option to buy the Prodeco coal assets, will pay US$2.25 billion plus profits accrued by the operations and cash invested by Xstrata, it said today in an e-mailed statement.

“Glencore pulls off another good deal, buying prized Prodeco assets at a very attractive price considering the quality of the assets, the development potential and favorable coal markets,” Miriam Hehir, a credit analyst at RBC Capital Markets in London, said today. Regaining Prodeco is “value-enhancing in the event of an IPO,” she said.

The trader sold its first convertible bonds in December, saying the debt can be exchanged for shares if it holds an IPO.

The bonds give Glencore a so-called pre-conversion equity value of US$35 billion, it said at the time. The company may hold an IPO in the fourth quarter, Liberum Capital Ltd said in a note.

An IPO by the business, renamed Glencore after management bought former fugitive US financier Marc Rich’s interest in Marc Rich & Co in 1994, would end more than three decades of the company operating as a closely-held partnership.

Glencore sold Prodeco last year for US$2 billion to fund its participation in Xstrata’s £4.1 billion-pound (US$6.2 billion) rights offer. The final cost of buying back the assets from 34%-held Xstrata will be about US$2.7 billion, Liberum said.

“We understand the purchase will be funded from cash and undrawn bank lines, and that Glencore plans to partly replenish its liquidity in coming months, including cash from potential disposals,” Alex Herbert, a London-based Standard & Poor’s analyst said in a report today. “For Glencore, we view this transaction as being broadly neutral to its credit profile.”

Carlos Perezagua, a Glencore spokesman in Baar, declined to comment on the possibility of any asset sales.

Xstrata’s 2010 earnings per share will fall 2% following the sale of Prodeco, which is worth US$3.9 billion, Nomura International plc wrote in a March 1 report. Prodeco contributed 11% of Xstrata’s coal output last year.

The operation, combining two open-pit coal mines, port facilities at Santa Marta on the Caribbean coast of Colombia and a 40% stake in a railway, has saleable reserves of more than 250Mt of coal, Xstrata said last year.

“Glencore will finance the repurchase in a manner consistent with its commitment to maintain its investment grade ratings,” the trading company said in the statement.

“Although no partner is involved with Glencore in the purchase at this stage, we would not rule Glencore profiting from selling a minority stake in the Prodeco assets after the deal with Xstrata completes in the next few months,” RBC’s Hehir said. “Irrespective of partner involvement, we expect Glencore to retain investment grade ratings.”

March 5 (Bloomberg)