Mining company Xstrata, commodities giant Glencore agree to $90 billion merger

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FILE - In this April 14, 2011 file photo, the headquarters of Glencore are seen in Baar, Switzerland. THE CANADIAN PRESS/AP, Keystone, Urs Flueeler

LONDON - Anglo-Swiss mining group Xstrata PLC announced plans Tuesday to merge with commodities trading giant Glencore International PLC in a deal that will create the world's fourth largest natural resources group.

The combined company, to be called Glencore Xstrata with a combined market value of $90 billion, will control a chain of businesses from mining to refining, storage and shipping of basic commodities like coal, copper and corn.

The new group would be the world's largest producer of thermal coal — which is used to fire power stations — as well as becoming major a force in the mining and production of copper, used in electronic cables, and other metals including ferrochrome, a key ingredient in the production of stainless steel. Its properties would include major nickel mining and refining businesses in Canada, where Xstrata subsidiary Xstrata Nickel owns the former Falconbridge nickel company in Sudbury, Ont.

The announcement of the terms of the deal comes just a few days after the first public acknowledgment that the two companies were in talks about a long-mooted tie-up — merger talks, codenamed "Everest", have gone on for years.

Xstrata, based in Zug, Switzerland, was formed in 2002 when it bought Glencore's coal assets. The company mines copper in the Americas, zinc in Spain and ferrochrome and vanadium in Australia and South Africa.

Glencore extracts, ships and refines raw materials from coal to corn. It is based in the Swiss town of Baar but has its main listing in London.

Glencore was founded in 1974 by Marc Rich, the trader who was controversially pardoned on tax evasion charges in 2001 by U.S. President Bill Clinton just hours before he left office. Rich sold the company to its employees in 1994, and the company has been at pains to distance itself from its founder. Environmental groups, however, have since targeted the company for its mining interests.

However, even though the deal is likely to win the day — Glencore already owns 34 per cent of Xstrata — leading shareholders were already beginning to criticize the terms of the all-share deal.

Under the terms of the merger agreement, Xstrata shareholders would receive 2.8 Glencore shares for each of their shares. That represents a premium of 15.2 per cent based on Monday's closing prices.

The merger is projected to yield cost savings of $500 million in the first full year, primarily in marketing, while creating the world's fourth largest global diversified natural resource company, with operations in 33 countries. It will also give the combined company greater leverage to borrow money for its operations — a key advantage in the high-volume, low-margin commodities business.

"The commodities value chain is becoming longer and more complex, creating opportunities for a company that can pre-emptively participate at every stage," said Xstrata Chief Executive Mick Davis, who will become CEO of the merged company.

"Glencore Xstrata would be well positioned to do just that, creating value from resource extraction to customer sales and services, at a time when demand for our combined products continues to grow," Davis said.

Davis told a conference call that he expects the merger to complete in the second half of this year, assuming regulators give the deal the all-clear.

Glencore CEO Ivan Glasenberg, who will take the titles of deputy CEO and president, said the merger represents "a fantastic opportunity to create a new powerhouse in the global commodities industry."

Xstrata Nickel, a Toronto-based subsidiary has about 1,000 employees in Sudbury and 850 at its mine and concentrator in northern Quebec.

A union leader representing 850 mine and smelter workers in Sudbury said last week he's doesn't expect much change if Xstrata merges with Glencore International.

"The rock ain't moving," said Richard Paquin, president of the Canadian Auto Workers Local 598, said Thursday.

"For us it is not a new venture,"' he told The Canadian Press. "It is a matter of co-operating with the new employer if it every happens and trying to get the best we can for our workers.''

He said the Sudbury operation has already been through the uncertainty of Xstrata's takeover of Canadian nickel and copper producer Falconbridge in 2006 after a takeover battle that lasted nearly two years.

Morningstar analyst Daniel Rohr Xstrata is flush with cash, so any projects in Canada that the company wants to pursue are unlikely to gain any additional benefit from a deal with Glencore.

"I wouldn't expect the combined entity to be able to grow the Canadian operations more than Xstrata on its own,"' Rohr said.

"There's no major capital constraint on them right now that's preventing organic growth."

Last year, the company approved two Xstrata Nickel projects totalling US$649 million in Canada including a $530-million Raglan extension project in the Rouyn-Noranda area of Quebec and the $119-million Fraser Morgan project in Sudbury in northern Ontario.

Paquin noted that since Xstrata took over Falconbridge, and union and company have signed two consecutive labour agreements without a work stoppage, a boast that he couldn't make about Falconbridge.

"So you could say it is probably a little better company to deal with at that level," he said.

Xstrata shares were down 2.6 per cent at 1,228 pence in midday trading in London; Glencore shares were down 0.8 per cent at 457 pence.

The movements in the share prices indicate some disappointment in the markets that the premium being offered isn't as high as some had hoped.

David Cumming, head of equities of Standard Life Investments, which owns a little more than 2 per cent of Xstrata stock, has criticised the deal for undervaluing the mining company's assets and potential. "Consequently it is our intention to vote against the deal unless the merger terms for Xstrata shareholders are materially improved."

Schroder Investment Management, which owns around 0.7 per cent of Xstrata, also said the terms undervalued the company and that it was a poor deal for the majority of shareholders.

The merger agreement was announced as Xstrata reported a 22 per cent gain in full-year profit to $5.7 billion, compared to $4.7 billion a year earlier. Revenue was up 11 per cent to $33.9 billion.