By Myra P. Saefong, MarketWatch
SAN FRANCISCO (MarketWatch) — The merger announcement from Glencore International PLC and Xstrata PLC this week turned heads because the combination of a commodities trading powerhouse and a major miner, especially those of such size and scope, is a rarity, but if the move succeeds, more may follow.
"Trading houses are going to be the T-Rexes on the mining space from now on," said Christopher Ecclestone, mining strategist at Hallgarten & Company LLC, dominating offtake and elbowing the "old mine finance banks out of the way."
"Trading houses match buyers and sellers and they have the finger on the pulse. Like a discount store, they can always move product by cutting prices. Miners just don't have that facility" unless they're enormous like BHP Billiton /quotes/zigman/184879 UK:BLT -2.72% or Rio Tinto /quotes/zigman/155899 UK:RIO -1.13% , he said.
So Glencore /quotes/zigman/5131911 UK:GLEN -1.75% /quotes/zigman/5690051 GLCNF -2.71% and Xstrata /quotes/zigman/300486 UK:XTA -0.70% /quotes/zigman/300473 XSRAF -1.51% may be just the start of a "fascinating new evolution," said Ecclestone.
On Tuesday, Glencore, the world's largest commodity trader, and Xstrata, one of the biggest miners, agreed to an all-share merger of equals that would create a $90 billion natural-resources giant. Read about the merger deal.
"Full integration of an upstream miner and a downstream marketer/trader like Glencore provides a bigger platform for a company to grow through acquisitions," said Brian Hicks, co-manager of U.S. Global Investors' Global Resources Fund /quotes/zigman/244712 PSPFX 0.00% . "It would create something similar to an Exxon /quotes/zigman/203975/quotes/nls/xom XOM -1.27% or Chevron /quotes/zigman/289939/quotes/nls/cvx CVX -1.02% of the mining space."
Valued at $48.4 billion including net debt, the deal would be the largest mining sector deal ever, if completed, according to Dealogic.
"The merger of these two already giant-sized companies would create a unique Herculean combination," said David Millard, chair of law firm Barnes & Thornburg's business practice, based in Indianapolis.
The merged entities would "be the number one in coal and zinc together [and have] key market positions in copper, lead and nickel," he said. "The combination is unique because it combines a diverse group of resources and pipelines with one of the world's strongest commodities marketing businesses."
The move comes on the heels of growth in mining sector mergers and acquisitions, which have climbed over the past two years in number and deal values, data from Dealogic show.
'An increase in mergers and acquisitions and one of this record size is monumental for the commodity sector.'
Jeb Handwerger, GoldStockTrades.com
In 2009, the industry saw 1,915 mining sectors deals valued at a total of $64 billion. By 2011, that rose to 2,714 deals, with a value of almost $169 billion, according to Dealogic.
"An increase in mergers and acquisitions and one of this record size is monumental for the commodity sector," said Jeb Handwerger, editor of market analysis provider GoldStockTrades.com.
"We expect the producers or developers of natural resource assets to have more access to capital," he said. "This is just the beginning and a huge step. We may see an increase in bidding wars and large miners looking for growth through M&A activity in the natural resources sector."
So "get ready for a lot of developments in industrial and precious metal mining in 2012," Handwerger said.
Clearing the hurdles
The Glencore and Xstrata merger still has to clear regulatory hurdles but most analysts expect the deal to close, potentially paving the way to stronger growth in mining sector M&As.
"An argument regulators should expect to hear is that Glencore and Xstrata should be viewed as already being one company because of Glencore's existing 34% ownership of Xstrata," said Barnes & Thornburg's Millard.
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