Critical sizeHowever the essence is elsewhere

Cynthia Carroll group, Anglo American, was faced with a difficult choice. Perhaps the most difficult in its nearly century-old history. The advances of Xstrata are not new. Already last year, the mining company of Mick Davis had approached Anglo American to explore ways of a merger. Without success. Cynthia Carroll had then felt no embarrassment to decline the offer. In other more complicated conditions, she reiterated his choice today by finding, in conjunction with all of the other members of the Board of Directors, that this project is not in the interest of the shareholders of the company.

The company is committed since October 2007 in the application of a larger plan of rejuvenation of its assets and redefinition of its perimeter. But the overhaul of Anglo American has been costly. Acquisitions of new projects and mines were made to the high price, as the usual since 2004. The burden of these redemptions proved to be heavy to wear after the worsening of the crisis of credit in September 2008. Net debt of the Anglo American group match end of 2008 a third of its capitalization before Xstrata announced last weekend.

At the City, it is claimed that some influential Anglo American shareholders urge branch that she values more their interests. A marriage would do well to the case. And why not with Xstrata, a society of equal size with a powerful shareholder as the trader Glencore, which provides more marketing of most of its products While it is fear and its presence in force in the capital of Xstrata (35) is at the root of its relative undervaluation.

Critical size

However, the essence is elsewhere. In the size critical mining groups. Offensive joint of BHP Billiton and Rio Tinto iron ore has certainly accelerated the reflection of the stakeholders. The religion of Xstrata is made for a long time.

Mick Davis knows that the external growth of the group is too slow to be eligible for a leading role in this strategic industry. The failure of the attempt of taking control of the number three Anglo American Platinum, Lonmin, and as imposing as that debt imposed on Xstrata to escape through the top via a major grouping operation. With Vale, number two global diversified mining group, it has failed the Brazilian refused to entrust the commercialization of its products to Glencore.

The project remains relevant

But the Swiss trader is willing to reduce significantly its participation in any new package involving Xstrata but does not agree to break the privileged trade relations that bind to the producer of ore. Its growth is at stake. Glencore is therefore very much in favour of the scheme adopted with the global leader of the Russian Rusal aluminum. Participation limited to 10, no control operations but solid agreements for privileged access to the producer of grey metal products.

The project carried by Xstrata is relevant both to industrial and financially. The proximity of several of their mines in the coal thermal (South Africa, Colombia) and copper (Latin America) two products with the new set becomes world leader are expect significant synergies. Some analysts estimate them at 1.7 billion dollars per year.

On the balance sheet, the new group would have fewer problems of debt management and wider access to capital markets.

But the road to marriage is more than ever planted minefield after unanimous decision of the Board of Directors of Anglo American. The shareholders of the latter require a substantial premium, that does not provide the proposal of marriage between equals by Xstrata. In addition, Mick Davis firm cannot, at the risk of destabilizing again its balance sheet, put much cash on the table. Weak points that could be exploited by Vale if he decided to launch an alternative offer. The Brazilian has strong enough kidneys, including to acquire Xstrata and Anglo American as a whole.