Zinc Could Stymie Xstrata-Glencore Merger

By James Wellstead — Exclusive to Zinc Investing News

As European competition regulators continue to discuss the approval of one of the largest resource sector mergers in recent history – the proposed deal between Xstrata (LSE:XTA) and Glencore (LSE:GLEN) – the merger may face hurdles due to its outcome for zinc markets.

Christopher LaFemina, an analyst with global securities and investment bank Jefferies in New York, released a note in late March that stated the combination of the two companies may cause “significant concerns regarding anti-competitive conditions” for zinc.

Glencore is currently the largest commodities retailer, with more than 60 percent of international zinc trade in 2010, and owns significant refining capacity as well. However, the company is seeking to bolster its engagement in the zinc business by gaining complete ownership of Xstrata (Glencore already holds 34 percent of Xstrata), which is currently one of the world’s largest miners of zinc. The merger would create the largest zinc producer and fourth-largest miner in the world.

Extensive talks between the two companies and European Commission competition regulators on the proposed US $90 billion deal have already delayed the shareholder vote date by at least a month. The companies are trying to hedge off antitrust scrutiny from countries around the world including the US, China, and the European Union.

Critics argue that the new company’s market share of 16 percent of global zinc ore production (1.6 million tonnes) would give it too much control of the zinc market – about 50 percent of the European market according to LaFemina – and could drive up global zinc prices as a result.

Glencore’s current discussions with European Commission competition regulators are aimed at avoiding a Phase 2 inquiry, and could likely include agreeing to sell certain zinc production plants, EU officials have said.

Shareholder support

Despite the potential value for shareholders that the merged company could provide, 13.6 percent of Xstrata shareholders voiced their disapproval of the deal by voting against the re-election of Glencore’s CEO, Ivan Glasenberg, as the head of the new combined company.

Shareholders at Xstrata’s Annual General Meeting this week in Zug, Switzerland have been unhappy with the lack of premiums in the present share buyout deal and feel that the Xstrata board has not done enough to protect their interests while receiving handsome management pay packages. 16.4 percent of Xstrata shareholders voting against the deal would be enough to block the proposed merger from occurring.

Despite the dissent, Xstrata officials feel that the value prospect of the deal will be enough to convince shareholders to support the offer.

“The combination represents [an] opportunity to create more value for shareholders than can be created on a standalone business,” Chairman Sir John Bond told shareholders this week.

Maintaining market share

Xstrata has been working on maintaining current production positions after announcing that zinc operations at its Brunswick mine will close no later than March 2013. The closure of Xstrata’s Brunswick and Perseverance mines in New Brunswick, Canada will remove more than 350,000 tonnes of production from the global supply and has been a key component of zinc’s recent price surge.

Efforts to maintain Xstrata’s dominance in the zinc market will partly come from the planned expansion of its Mount Isa mining operations and the start-up of its Lady Loretta mine, both in Australia.

Xstrata Zinc’s CEO for Australia, Brian Hearne, announced that the company will spend A $87 million on expansions within Australia over the next year, and believes that Australia will play a key role in retaining Xstrata’s zinc ore output in years to come.

Securities Disclosure: I, James Wellstead, hold no investment interest in any company mentioned in this article.