London (Platts)--7Feb2012/450 am EST/950 GMT

Switzerland-based mining group Xstrata and commodities trader Glencore have agreed the terms for an all-share merger that will create a natural resources group with a market value of $90 billion, the companies said Tuesday.

The merger will create a "natural resources super-major," Xstrata CEO Mick Davis told a conference call to discuss the company's 2011 preliminary results and the Glencore merger.

The merged company will be active in 18 commodities, with operations in 33 countries, marketing in 40 countries, 101 mines, 25 smelters and 31 concentrators, plus significant logistics operations.

It will be the fourth-largest global diversified natural resources company and the 10th-largest company on the London Stock Exchange's FTSE 100 index, Davis said.

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The company's global diversity will enable it to respond to changing commodity trade patterns, Davis said, adding: "Trade flows are changing fundamentally due to the migration of growth to developing economies."

Taking copper as an example, he noted that, while in 1996 North America and Western Europe combined accounted for 52% of global copper demand, with Asia and the Middle East at 38%, those shares are now at 25% and 64%, respectively.

Based on the two companies' combined 2011 EBIT by division, copper was the largest contributor at 37%, followed by coal at 26%, marketing at 16%, zinc/lead at 13% and nickel at 5%, according to slides accompanying the conference call.

The merged company's breadth of activity, from traditional mining through processing and refining to trading and marketing, will differentiate it from its competitors, Davis said.

"It's the only company of significant size involved in every single facet of the value chain," he said.

The two companies have identified initial synergies totaling around $500 million from the merger, primarily from margins generated by Glencore from marketing Xstrata's production of copper, zinc and coal.

Glencore CEO Ivan Glasenberg told the conference call that whereas Glencore previously had agency and licensing agreements with Xstrata, the merger would see a "clear flow of Xstrata tons into the Glencore system," which would allow the company to maximize price arbitrage opportunities.

For example, he said, in copper the merged company could "utilize smelters within the Xstrata system as a trading tool," taking advantage of Glencore's existing relationships with third-party suppliers to open up the possibility of directing third-party concentrates to Xstrata smelters and diverting Xstrata concentrates to smelters elsewhere.

Existing Xstrata management will continue to run the production side of the business, with current Glencore management continuing to handle the trading and marketing side.

The two companies see only limited issues with the integration process, Davis said, adding: "We know each other very well. We have a decade of working together."

REGULATORY APPROVALS

The deal will take the form of an all-share offer by Glencore for the remaining 65.92% of Xstrata that it does not already own. A merger ratio of 2.8 new Glencore shares for every Xstrata share held, excluding Xstrata shares already owned by the Glencore group, will provide Xstrata shareholders a 45% stake in the combined entity.

The merger values each Xstrata share at 1,290.10 pence, representing a 15.2% premium to the miner's closing share price of 1,119.50 pence as of February 1, the last business day before Xstrata announced it was in discussions with Glencore.

At least one Xstrata shareholder was unimpressed with the terms of the deal, however.

"Although we see some merit in the merger of Xstrata and Glencore the proposed exchange ratio clearly undervalues Xstrata's assets and future earnings contribution," said David Cumming, head of equities at Standard Life Investments, in a statement.

"Consequently it is our intention to vote against the deal unless the merger terms for Xstrata shareholders are materially improved," he added.

Xstrata's Davis will be CEO of the combined group, while Glasenberg will assume the role of deputy CEO and president.

The merger is to be effected by a court-sanctioned scheme of arrangement, which is expected to become effective in the third quarter of 2012.

The deal is subject to regulatory approvals in the US, China and South Africa, plus potentially some individual countries in Europe, "but we're waiting for the EU to opine on that," Davis said.

The longer lead times are likely to be in China and South Africa where there is a slightly longer process than in other jurisdictions, but the companies expect the deal to be complete early in the third quarter, he added.

Davis said he did not anticipate any major regulatory obstacles to the merger.

"The EU in the past has always treated Glencore and Xstrata as one unit," he said, adding that while the companies do not expect their market share in any particular commodity to cause a problem, "they do trigger filing requirements."

The combined entity is proposed to be called Glencore Xstrata International and will be listed on the London and Hong Kong stock exchanges.

It will be headquartered in Switzerland and continue as a company incorporated in Jersey.

--Andy Blamey, andy_blamey@platts.com
--Vandana Hari, vandana@platts.com

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