For a company that has such a large presence in Australia, and that played such a significant role in the ousting of a Prime Minister, Xstrata gets curiously little attention in the local media. And its biggest shareholder, dominant customer and would-be outright owner Glencore gets even less.
Glencore’s takeover bid has excited some media interest, as has the wealth of Glencore CEO and Xstrata board members Ivan Glasenberg, who is notionally an Australian, but not much else. Certainly not Glencore or Xstrata’s tax dodging. Both are domiciled in one of the world’s more exclusive tax havens, Zug in Switzerland. Glencore listed last year in London, where Xstrata’s primary listing is.
As Glenn Dyer pointed out a couple of months ago, Glasenberg’s bid to buy the rest of Xstrata was in heaps of trouble, and since then it’s only got worse. Last week Qatar’s sovereign wealth fund, which wants a significantly higher price — 3.25 Glencore shares per Xstrata share, not Glasenberg’s bid of 2.8 — lifted its shareholding in Xstrata. Glasenberg had earlier in the week declared he could walk away from the takeover. “It’s not the end of the world,” he said.
If the deal fails, it is indeed not the end of the world for Glencore. Glencore is a trading company, across a wide range of commodities, not just minerals. As a trading company, it likes contracts with companies that it owns or part-owns that, as the Zambian example demonstrated, afford it flexibility about how to shift income around the world. Glencore is also a significant agricultural commodities trader, primarily in grains. In the first half of 2012, Glencore earned around US$9 billion in revenue from food, about a third of its mineral earnings. But its EBIT was only $US100 million, reflecting poor grain prices.
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All that looks likely to change now with the drought in the US and surging world food prices. “In terms of the outlook for the balance of the year, the environment is a good one. High prices, lots of volatility, a lot of dislocation, tightness, a lot of arbitrage opportunities,” the company’s head of agricultural products bluntly said last week. Oxfam immediately attacked the company for stating its intention to make money from the “arbitrage opportunities” arising from rising food prices that may well see a return to the widespread food riots of 2008.
While Glencore was signalling it would be able to boost profits because of a major drought, the takeover deal struck further trouble on the weekend when the Association of British Insurers issued a warning not about the deal itself but about the staggering retention payments planned for Xstrata executives in the event the takeover is successful. Mick Davis, the South African CEO, would be paid £29 million ($44 million) to stay on, as part of a £170 million package to keep current executives, contingent only on securing some savings across the company.
Three weeks ago, Davis unveiled a drop in half-year profit of more than 40% due to “a cyclical downturn in commodity prices”. But he looked forward to lower costs “as a number of capital projects are delayed and lower commodity prices start to flow through to key inputs”. Because of the downturn, Davis said that the company, which earns about a third of its revenue in Australia, was “deferring” $US1 billion worth of capital investment, 40% of it into 2013. The company is still planning to spend more than $US7 billion in investment this year.
And there was nary a word about the mining tax or carbon price.