London, England — MININGREVIEW.COM — 22 June 2009 – Swiss-based Xstrata – the fifth largest diversified metals and mining company in the world – wants talks with mining rival Anglo American about a proposed merger of equals worth about US$68 billion (R544 billion), seeking increased scale and cost synergies.
Reporting this development here, Reuters quoted a source close to the situation as saying that Anglo was likely to resist the attempt by Xstrata to forge a larger mining group which would be better able to compete with bigger competitors BHP Billiton, Vale and Rio Tinto.
Xstrata – which has a market value of US$33 billion (R264 billion) said in a statement it had recently sent a proposal to Anglo, worth US$35 billion (R280 billion).
The approach by Xstrata – which has regarded Anglo an attractive partner for several years – comes after sector No. 1 BHP agreed on 5 June to combine its Australian iron ore operations with those of Rio Tinto in a joint venture.
BHP has a market value of US$144 billion (R1 152 billion), Vale is worth US$93 billion (R744 billion) and Rio US74 billion (R592 billion)
“Xstrata is seeking to engage with the board of Anglo American regarding a merger of equals that would realise significant value for both companies’ shareholders,” Xstrata said in a statement. “The combination would create a premier portfolio of operations diversified across multiple commodities and geographies, with enhanced scale and financial flexibility to fund future growth.”
Anglo said in a statement that the situation was at a very preliminary stage, but declined to give further details.
A source familiar with the situation said Anglo had only received the approach a few days ago.
The source, who declined to be named, said Anglo’s board would examine the value for shareholders in a combination with Xstrata, compared to the value of remaining independent.
One main issue was the fact that Anglo’s assets are higher quality and have longer lives than those of Xstratra, he said. “Why would you want to dilute that portfolio with lower value assets?” the source added.
Xstrata said it had already identified “substantial operational synergies” from a link-up, but did not give any figures.
Nomura analyst Paul Cliff estimated in a recent note that a merger could result in cost synergies of US$700 million (R5.6 billion) per year, or 2% of combined operating costs.
Bank of America-Merrill Lynch analyst Jason Fairclough pegged cost savings at US$875 million (R7 000 billion) a year, including benefits from putting Anglo assets into Xstrata’s Swiss tax domicile.