Glencore move on Xstrata lights fire under M&A hopes

Glencore's 
earlier-than-expected move on mining group Xstrata could
indicate that mining company valuations have reached a bottom,
getting bankers excited about the prospect of a revival in
merger activity.     



    Glencore is already Xstrata's biggest shareholder and a deal
has been expected since the commodities trader went public in
2011.   



    But coming just a year after the bumper $10 billion listing,
and after a dismal performance in Glencore's shares, it is being
read as an indication that the time could now be right for more
mining deals, with valuations low and cash piles high.   



    "It reinvigorates the sector," said Liberum analyst Dominic
O'Kane.   



    A combined Glencore-Xstrata, is expected itself to retain
the appetite for deals, particularly in areas it has earmarked
for growth, like iron ore. And a sharp drop in Glencore's
borrowing costs - the cost of insuring its debt has come off by
almost a third this week - will certainly make it easier for the
company to borrow.   



    Some are even speculating that the merged group could take
another swing at mining group Anglo American, under
pressure from its larger peers and embroiled in a potentially
damaging legal battle in Chile.   



    "The consensual target is Anglo, and that is based on the
fact that Xstrata tried to acquire Anglo in 2009," said
Liberum's O'Kane. "A combined company would be around 65 percent
larger than Anglo and there is expectation it could have a go
again - and their probability of success would be higher this
time round."   



    Deal-hungry bankers say they see the potential for more
all-share deals that take advantage of low valuations.   



    "If you are able to find opportunities to find share deals,
mergers of equals, there is maybe more scope for them," one
senior industry banker said. "What is difficult in an
environment as volatile as this, is to go out and do very large
cash deals with big premiums. As the CEO and board you would be
taking a huge amount of risk - you are taking a lot of cash
out, and you are making a bet on the future."     



    
   
MID-CAP FLURRY      

 
    Buying rather than digging new mines is also becoming more
attractive. Mining companies continually seek to
replace their reserves and typically weigh up building new mines
versus buying production. Rising costs, increased labour
troubles and tougher government relations, have made buying more
appealing.    



    This, analysts and bankers say, means deals will be more
likely among mid-cap companies, where gold, iron ore and coal
are expected to be the hottest commodities, and where deals are
possible without large amounts of cash.   



    Mid-cap deals were already the mainstay of the market last
year - 2011 saw the highest value since 2007, but the recovery
has been marked by a higher number of lower value deals.   



    Glencore-Xstrata could also contribute with asset sales,
like Xstrata's 25 percent stake in troubled platinum producer
Lonmin, a left-over from its bid for the company in
2008, which was stymied by the financial crisis.   



    But the hotspot, industry experts say, is likely to be gold,
where companies' cash flows are at record highs and equity
valuations at their lowest in more than a decade.   



    "Gold remains much more fragmented than most of the
other commodities," a second senior sector banker
said. "There is still a significant tier of emerging companies
with attractive assets and consolidation remains on the agenda."   



    Unlike the more volatile base metal space, gold has remained
robust with prices still more than three times what they were
less than a decade ago, and analysts, bankers and industry
players point to the metal as a likely bright spot.   
    "The longer gold prices stay high, the higher the
probability someone will make a move," said Tyler Broda, analyst
at Nomura in London.   



    The sector, buoyed by cash flows that have far exceeded
capital expenditure plans, has already seen deals in recent
months, including a move by Qatar Holdings to provide funding to
European Goldfields that handed it a almost 10 percent
stake in the miner last year. This was the Gulf investor's first
move into gold.   



    European Goldfields, which is developing mines in Greece,
has subsequently agreed to be taken over in a separate $2.4
billion deal with Canada's Eldorado Gold.   



    But industry sources point to other potential targets,
particularly in exploration, including miners like Australia's
Gryphon Minerals, developing the Banfora gold project
in Burkina Faso, or AIM-listed Goldstone Resources,
which has projects in Ghana, Senegal and Gabon.   



    Miners digging for gold face even more pressure to keep
stocks topped up, as the average life of a gold mine is under a
decade, compared to roughly three times that for copper.