Merged Glencore, Xstrata would take aim at iron ore

An $80 billion 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 guarded sectors.     



   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 wants 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, which have no intention of loosening
their grip, say industry players and analysts.     



   "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 suppliers.    



    "There is no doubt Xstrata would like to do more in iron ore
but if they want to be big they have to buy a big player," said
Macquarie steel and iron ore analyst Colin Hamilton.    



   Xstrata is considering an all-share merger of equals with
Glencore, which would leave the new entity with low enough debt
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 the market.     


     
   Last year was a boom for mining acquisitions - $98 billion
worth, the largest since 2007 - but the Glencore-Xstrata deal,
valued at $80 billion, would be the biggest since Rio Tinto
bought Alcan in 2007.   



    Rio de Janeiro-based Vale failed to buy Xstrata in 2008 for
an estimated $90 billion.   



   "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
Pervan.    



   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 (AQA.AX may be in their sights.    



    The Pilbara is also closer to China, the world's largest
iron-ore consumer, than key sources of high-grade ore in Brazil
and Africa, giving it an advantage on shipping costs and times.   



    Steelmakers would certainly welcome a new iron ore player
that could challenge Vale, BHP Billiton and Rio Tinto which,
they feel, have too much power when it comes to iron ore price.   



    The "big three" together account for about 70 percent of the
global seaborne iron ore trade.   



    In order to become a significant player in the iron ore
market however, Xstrata and Glencore would have to move quickly,
as the big three are also expanding their iron ore mining
activity.   



    "They should rely on a combination of takeovers and new
projects development," said Meps iron ore analyst Kaye Ayub.   



    "New projects are expensive to get going and it takes time
to take them to fruition so a mixture of the two would be a
better way to expand."    



   
STIFF COMPETITION     

    
   Xstrata's stiffest competition for iron ore mines could come
from Vale, the world's biggest iron ore producer. Vale mines
about 300 million tonnes a year in Brazil and accounts for more
than a quarter of world sea-borne exports. Australian assets
would help it cut shipping costs to China, its main market, and
better compete with BHP Billiton and Rio Tinto.     



   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 percent of the project, which will cost an estimated $6
billion to develop. Privately held American Metals and Coal
International owns the other 50 percent.     



   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
percent 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, making  
the risks that come with huge investment projects more
affordable.     



   If Xstrata's attempt to acquire AngloAmerican 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 talks with AngloAmerican left Xstrata
with little in the way of iron ore holdings.    



   In 2011 it paid A$532 million for Mauritania iron ore
prospector Sphere Minerals and owns 50 percent in the Zanaga
iron ore prosect in the Republic of Congo.   


  
   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, its 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.