Xstrata Best Anglo American Suitor, Say London Analysts
Published by MAC on 2007-04-04Source: Creamer Media
Xstrata best Anglo American suitor, say London analysts
By: Martin Creamer
Creamer Media: 4 Apr 07
The voracious South African-led London-listed diversified mining company Xstrata plc was the most logical suitor for South Africa's iconic Anglo American plc in restructured form, three London analysts concurred on Wednesday.
The greatest logic would exist in a combination of Xstrata and Anglo American, which was achievable for Xstrata in terms of balance sheet and earnings a share impacts, Simon Toyne, John Meyer and Marc Elliott of Numis Securities Limited said.
In a detailed 24-page analysis of the potential attraction of Anglo American to diversified mining majors like Xstrata, BHP Billiton and Rio Tinto, they placed Xstrata in pole position.
The Numis analysts believed, however, that there was potential for additional restructuring of the $75,9-billion Anglo American plc – headed since March 1 by Canadian CEO Cynthia Carroll – beyond the current programme of demerging Mondi and disposing of AngloGold Ashanti. Such additional restructuring would involve the divestiture of Tarmac and the remaining South African-based non-mining businesses.
The residual Anglo American would then consist of Anglo Platinum, which was approaching half of the total value of the remaining diamond, base metal, coal and iron-ore assets.
Details of the Mondi demerger, now considered only a month away, remained unclear, but Anglo guidance was to expect a dual-listed company structure and listing by mid-2007.
Though guidance on the timing and the nature of the AngloGold Ashanti disposal was vague, Numis believed that a number of options were being considered, including a trade sale to a gold major.
Numis said the purchase of the remaining 25% of Anglo Platinum, at a current cost of $9,4-billion at market value, would be logical.
While the platinum producers were more fully valued than diversified miners, elimination of the minorities would save the cost of maintaining a separate listing and would integrate control of Anglo Platinum directly into the Anglo American group.
The main potential problem would be political opposition in Anglo Platinum being the largest stock on the largely foreign-owned JSE and might be met coldly by government leaders, especially if AngloGold Ashanti also ended up being sold to a foreign owned gold major.
Anglo American's coal profit was split evenly between South Africa, Australia, and South America, which was a "very close" geographical fit with Xstrata's coal assets.
A combination of Anglo American with another large group would also create further geographic, asset and project diversity, helping to reduce the cost of capital still further, while giving the combined group control of a greater proportion of the industry project pipeline in certain commodities, ultimately increasing pricing power.
In copper, Anglo American's production was principally in Chile, including 44% of Collahuasi, of which Xstrata also owned 44%. Further, Xstrata had significant potential to grow its southern Peruvian copper business near Tintaya, 500 km from Anglo American's own key copper project.
While Anglo American produced nickel in Venezuela and Brazil, Xstrata already had substantial growth in nickel, which would be boosted by its acquisition of LionOre and its low-cost Activox technology.
While Anglo American had meaningful exposure to zinc, Xstrata was zinc short.
Xstrata's ferrochrome operations were located on the same orebodies as those of Anglo Platinum and Xstrata already had the Mototolo joint venture with Anglo Platinum in which Xstrata operated the mine, and Anglo Platinum the concentrator.
There would be certain synergies in combining their respective chrome and platinum-group metals operations in transport and logistics and the similarity of mining techniques in platinum and chrome, implying that Xstrata would be well placed to operate Anglo Platinum's mines effectively. Xstrata had also expressed a desire to be exposed to platinum.
Anglo American's iron-ore interests were held through Kumba Iron Ore and Xstrata had a desire to gain exposure to iron-ore production.
While Anglo American's diamonds exposure was held through its 45% stake in De Beers, Numis believed that diamonds might be of greater attraction to diamond industry players, or even the Oppenheimer family, which already owned 40%.
Overall, Numis believed Xstrata "clearly" had the best fit and most reason to attempt to acquire some or all of Anglo American.
It placed Rio Tinto in second place and BHP Billiton third in descending order of logic to acquire some or all of Anglo.
On a totally restructured basis - that is, current restructuring plan plus disposal of Tarmac and ferrous metals assets – Numis concluded that Anglo American's market capitalisation would be about $63-billion.
For Xstrata, with a market capitilisation of $48-billion, it would be a reverse takeover, but by issuing about 60% of its market capitalisation to Anglo American shareholders, Xstrata's gearing, after buying Anglo American, would be similar to the level after Xstrata's acquisition of Falconbridge.
Numis concluded that Xstrata could launch a bid for Anglo American with a sensible resultant capital structure and without diluting near-term earnings per share.