Xstrata and Glencore Merger on table

Xstrata, the mining company, acknowledged that a merger with Glencore, the privately held commodities trader, will likely create value.

The prospect of a merger between the two companies, which, in Willy Strothotte, share a chairman, has been building in recent months, as Xstrata pursued deals to gain scale, while Glencore tapped capital markets.

“As the market looks around at possible options for Xstrata and Glencore that is one option they will be considering,” Mick Davis, chief executive of the Swiss based mining multinational, said. “There are great advantages to being able to see through Glencore’s trading capability, and cementing that relationship could enhance that advantage rather than detract from it,” he said.

A merger with Glencore I believe is under active consideration, as Xstrata reachs a mature size from which it can focus on organic growth. But Mr Davis did say that: “I know Glencore’s management has thought about this.” Glencore declined comment.

Glencore, based in a Swiss village near Xstrata’s HQ office, owns 34% of Xstrata and already markets some of the mining company’s output.

Speculation about a merger followed Xstrata since its Y 2002 flotation, in which Glencore’s Australian and South African coal assets were spun off.

Mr Davis agreed to buy the assets after taking over a minor Swiss mining company. In December, Glencore launched a US$2.2B that lured some of the biggest names in the resources industry and also provided confirmation that the company was willing to take on new shareholders.

“Glencore’s problem is that the partners are constrained from monetizing their ownership,” said a banker familiar with the company. “They can’t pay out hundreds of millions of dollars to retiring partners without threatening the bottom line. A flotation would be one way to get around that.”

A merger with London-listed Xstrata would be another way to go public.

A test of any merger will come next month when Glencore has to decide whether to buy back its Prodeco coal mine from Xstrata. Analysts believe if Glencore exercises its buy-back option, a merger is unlikely then. —Paul A. Ebeling, Jnr. www.livetradingnews.com

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