With such turmoil on global stock exchanges, one might
wonder if Xstrata CEO Mick Davis and Vale CEO Roger Agnelli are
trying to perform their proposed merger/takeover - difficult
enough at the best of times - on the deck of a financial
Titanic.
On Monday, many stock exchanges around the world witnessed the
worst single day decline since the terrorist attacks of Sept.
11, 2001. The TSX saw $90 billion evaporate while European
exchanges wiped out $300 billion. In total, trillions of
dollars in investment value were lost. The U.S. exchanges were
closed for a holiday.
The "American contagion" as many are calling this stock market
slaughter - due to the U.S. subprime mortgage fiasco and
collapsing property values - continued Tuesday morning around
the world including American exchanges.
However, the Toronto Stock Exchange was slightly up, perhaps
reflecting the U.S. Federal Reserve Board's significant
three-quarters of a percentage point reduction to interest
rates yesterday.
So much for the theory that China and other Asian countries
have decoupled from the United States economy and would not be
affected by an American recession.
Also on Monday, Vale was forced to respond to speculation in
two leading Brazilian newspapers that the company was going to
bid US$90 billion for Xstrata.  In a press release, the
company stated, "In an environment of a global consolidation of
the mining industry, VALE has been maintaining a dialogue with
Xstrata Plc management. At the moment, these discussions had
not produced any material result yet."
Brazilian Vale is the second largest mining company in the
world, the biggest producer of iron ore - the key ingredient
for steel - and the number two supplier of nickel as well as
producing significant quantities of manganese, aluminum and
potash. Swiss-based Xstrata Plc is the fifth biggest miner with
major holdings in copper, nickel, coal and zinc.
It was no secret that Davis was putting Xstrata into play and
there are not many companies with deep enough pockets to come
to the negotiating table. Agnelli has publicly stated many
times that he is committed to making Vale into the world's
largest miner. Iron ore prices were supposed to rise about 50
per cent or more this year but current economic upheavals may
impact those optimistic projections.
If the hedge fund boys are salivating over another potential
bidding war, they may be sadly disappointed. In addition, two
of the key potential bidders are occupied. BHP Billiton, the
biggest mining company in the world, is currently attempting a
hostile takeover of Rio Tinto, the third largest miner.
The only other likely candidate is British-based Anglo-American
Plc - number four in size - which is in the process of spending
$16 billion through to 2017 to expand iron ore production at
its Brazilian mines and is also in talks with MMX Mineracao to
purchase its Amapa and Minas-Rio iron ore mines, also located
in Brazil, for $5.5 billion.
The Vale press release also stated, "VALE considers that the
current conditions prevailing in the global financial markets
may constrain the realization of a major strategic move."
Perhaps the Vale-Xstrata talks may just be focused on specific
properties or metal groups where significant synergies can be
attained. Those synergies are most clearly evident in the
Sudbury Basin where Vale Inco and Xstrata Nickel have been
operating on adjacent mining properties for decades.
Negotiations over major cost savings between the two separate
companies that range up to $350 million have been slow and
inconclusive. Those synergies are estimated to be about $550
million under one company. Without a doubt, dividing up and
putting a value on portions of adjacent ore bodies and
allocating cost savings between different feed streams to mills
at opposite ends of the basin are bound to be complex.
However, local rumours say that Xstrata Nickel has been putting
too high a value on their surface operations and that Vale
Inco, due to the enormous size of its reserves and clout, can
afford to wait them out.
It is well known that Xstrata Nickel is running out of ore in
the Sudbury Basin and its local smelter is not operating
anywhere near full capacity. This will continue even when their
new Nickel Rim mine starts production next year.
In the Sudbury Basin, Vale Inco has 175 million tons of proven
and probable reserves as of 2006. The 2005 figures for measured
and indicated resources were about 47 million tons and
approximately 48 million tons of inferred resources.
By comparison, Xstrata Nickel has seven million tonnes of
proven and probable reserves in 2006. Their measured and
indicated resources are about 26 million tonnes and 29 tonnes
of inferred resources.
Who would want to get into a bidding war to acquire Xstrata
Nickel's problems? We are obviously heading into a recession
and Davis seems to be more interested in immediate returns than
long-term growth. Maybe, if the current economic climate does
not allow Vale to affordably take over all of Xstrata, there
may be a side agreement in the works with Anglo-American or
another company to quickly buy some of the other assets.
Bidding wars occur in rapidly expanding markets. With the
tightening of global credit markets, downward turmoil in stock
markets and metal prices, and a Chinese economy that will be
impacted much more severely by an American recession than
previously thought, another rumble in the nickel jungle may not
happen at all.
Stan Sudol is a Toronto-based communications consultant who writes extensively on mining issues. Visit his new mining blog at:www.republicofmining.com
