Mining Journal > Finance > Xstrata’s Anglo bid may bring Vale back

Finance

 
Xstrata plc’s move to merge with Anglo American plc may spur other offers and reignite interest from Vale SA, more than a year after the Brazilian company ended talks to create the world’s largest mining group.

Xstrata’s proposed £22.4 billion (US$36.5 billion) “merger of equals,” which was rejected yesterday by Anglo, seeks to combine coal, copper and zinc mines across Africa, Latin America and Australia. The bid may spur Vale into action, said mining analysts Nick Hatch at ING Groep NV in London and Paul Cliff at Nomura Securities Co Ltd.

"We think Xstrata makes more sense for Vale than Anglo does,” Cliff said in a telephone interview in London. “Xstrata have said they want to participate in M&A, whether as predator or prey. The reality is that Xstrata have also put themselves in play with their approach.”

Xstrata’s proposal, the biggest transaction announced in Europe this year according to Bloomberg data, may spark consolidation among mining companies as they compete for access to resources while commodity demand rebounds. Vale raised BR18.4 billion (US$9.1 billion) in a July share sale, which Chief Executive Officer Roger Agnelli said would fund acquisitions and expanding existing projects.

A Vale spokeswoman based in Rio de Janeiro, who declined to be named because of company policy, said the company “doesn’t comment on market rumor” when asked whether it’s considering an approach for Anglo or Xstrata. Claire Divver, a spokeswoman for Xstrata in London, and James Wyatt-Tilby, an Anglo spokesman, both declined to comment.

Vale Chief Financial Officer Fabio Barbosa said in April last year negotiations with Zug, Switzerland-based Xstrata were “dead”. The deal would have allowed Vale to leapfrog BHP Billiton to become the largest mining company and cut costs by combining adjacent nickel operations in Canada and the French-controlled island of New Caledonia.

Talks broke down because of demands from Glencore International AG, Xstrata’s biggest shareholder, Agnelli said in March last year.

Vale sold shares in July, before commodity prices tumbled as a global economic crisis curbed industrial metals demand.

“An ambitious Vale wishing to increase its geographic diversification is likely to be able to swallow either” Xstrata or Anglo, Hatch wrote yesterday in a note.
    
“There is now some regained confidence that the market has probably bottomed out,” Dominic O’Kane, an analyst with Liberum Capital Ltd, said by telephone from London. “M&A is back on the agenda.”
    
Xstrata CEO Mick Davis has led US$27 billion of acquisitions in six years to add copper production in Chile, nickel mines in Canada, coal in Australia and platinum in South Africa.

Mining companies such as Xstrata are seeking growth to reach “critical mass,” which gives them bargaining power, said Craig Pheiffer, general manager of investments at Absa Asset Management Private Clients in Johannesburg.

"I don’t think that M&A in the mining sector has ever ended or will ever end,” said Tim Goldsmith, global mining leader for PricewaterhouseCoopers LLP based in Melbourne. “Mining is a wasting asset. To grow in the sector, you have got to explore or develop or acquire.”

June 23, Bloomberg