Sydney - An $80bn marriage of commodities trader Glencore
and miner Xstrata could lead to a new round of takeovers in iron ore, creating
a goliath eager to muscle its way onto one of mining's richest and most closely
Glencore and Xstrata, which have yet to reach a deal, would
together rank as the world's largest thermal coal exporter, the largest zinc
producer and third-largest copper miner - but would remain all but non-existent
in iron ore mining.
Xstrata has an open desire to get into iron ore, underlined
in 2009 by its attempt to buy mining giant AngloAmerican.
But it has been thwarted by a scarcity of major new
discoveries and a virtual oligopoly among mining giants Vale, Rio Tinto and BHP
Billiton [JSE:BIL], which have no intention of loosening their grip, say industry players
"With a fortified balance sheet thanks to Glencore,
it's a logical move for Xstrata which should light a fire under the others,
like Vale," said an Australian mining executive who asked not to be named.
Iron ore sells for around $140 a tonne to China, the world's
top buyer of the steel-making commodity thanks to the mass urbanisation
underway there, and only costs about $20-$30 a tonne to mine.
Australia alone provides almost half of China's iron ore
imports, with BHP Billiton, Rio Tinto and Fortescue Metals Group the main
Xstrata is considering an all-share merger of equals with
Glencore, which would leave the new entity with low enough gearing to fund a big
push into iron ore, including possible acquisitions in competition with the
likes of big miners Vale, Rio and BHP.
"They know they need to bulk up and bulk up real fast
to close the gap on the top three. Iron ore is an obvious area," a
resources banker said. He declined to be identified as he is not authorised to
speak to the media.
"For starters they don't have a presence, so expect one
bolt on to start with, followed by an audacious large one if the markets
support one," the banker said.
For its part, Glencore's iron ore marketing business has
soared since it was launched in 2008 and it has carved out a growing share of
Last year was a boom for mining acquisitions - $98bn worth,
the largest since 2007 - but the Glencore-Xstrata deal, valued at $80bn, would
be the biggest since Rio Tinto bought Alcan in 2007.
"It makes sense because if you want to hit the
industrialised commodity suite, you've really got to be across both the bulks
and base metals," said Australia & New Zealand Bank analyst Mark
In Australia's Pilbara iron belt, the holy grail of iron ore
deposits due to its rich lodes, fast-growing miners such as Fortescue, Atlas
Iron, BC Iron and Aquila Resources may be in their sights.
Xstrata's stiffest competition for iron ore mines could come
from Vale, the world's biggest iron ore producer, which mines hundreds of
millions of tonnes in Brazil but has been looking for entry to the Australian
sector to reduce shipping times to its main market, China.
Vale already operates in partnership with Aquila in coal
mining and has been long-rumoured to be interested in Aquila's as-yet
undeveloped West Pilbara iron ore project.
Aquila holds 50% of the project, which will cost an
estimated $6bn to develop. Privately held American Metals and Coal
International owns the other 50%.
Competition may also come from China itself.
Steel makers in China have been scouring the globe for their
own iron ore mines in South America, Africa and Australia, with third-biggest
mill Wuhan Iron and Steel vowing to become self-sufficient by 2015.
Under a merged entity, Glencore's mines would have added 25%
to Xstrata's operating profit in the first half of 2011.
The extra bulk might push the combined company firmly into
the top league of global miners. Scale helps in mining as big global mining
companies can more easily afford to take on the risks that come with huge
If Xstrata's attempt to acquire Anglo American in 2009 had
succeeded it would have immediately made the Swiss-based company number 5 in
the highly profitable seaborne-traded global iron ore market.
But the collapse of merger talks with Anglo American [JSE:AGL] left
Xstrata with little in the way of iron ore holdings.
In 2011 it paid A$532m for Mauritania iron ore prospector
Sphere Minerals and owns 50% in the Zanaga iron ore prospect in the Republic of
In June, Xstrata started exporting iron ore concentrate as
by-product from a copper mine in Australia at the modest annual rate of 1.2
million tonnes, it's only source and a pittance by global standards.
"Obviously the company (Glencore) must believe strongly
that the commodity cycle has bottomed and that China's economy is in for a
better-than-expected landing, hence their takeover bid being launched
now," said Fat Prophets mining analyst Angus Geddes.
Some analysts say it might be risky at this stage to go big
on iron ore amid signs Chinese demand growth is slipping.
"We are seeing early signs of iron ore demand
decreasing so it doesn't make sense to engage on greenfield expansion for iron
ore right now," said Henry Liu, head of commodity research at Mirae Asset
Securities in Hong Kong.
"From 2003 to 2011, we have seen the demand growth peak
in iron ore and with more mines coming onto the market in 2014 or 2015, there
may be an oversupply," he said.