Anglo American Plays Hard to Get

Swiss mining giant Xstrata must have forgotten to play the mood music and properly woo rival Anglo American (Nasdaq: AAUK  ) . It's clear no sparks flew during Xstrata's preliminary advances, which were spurned with the equivalent of a slap in the face.

On Monday, Anglo American issued a press release conveying the Board's staunch opposition to the merger, opining that the "strategic case for the combination is unattractive" for shareholders, and adding that the terms of the merger of equals offer were "totally unacceptable."

For starters, Anglo appears quite content with its level of exposure to precious materials like platinum and diamonds. It owns a 45% stake in the world's No. 1 diamond producer, DeBeers, and the group's Anglo Platinum subsidiary enjoys the top spot in platinum with an incredible 39% of global production.

Citing strong market fundamentals for such precious assets, versus relative weakness in base metals, Anglo feels that an Xstrata combination would dilute that advantageous asset mix with unwanted additional exposure to materials like nickel and zinc. While I see some merit to this argument, I find it a bit hard to swallow a strategic commitment to a precious portfolio when the company recently divested more than $1.8 billion worth of gold exposure (including its legacy stake in AngloGold Ashanti (NYSE: AU  ) ) over the past year.

I pointed out Monday that an Xstrata / Anglo pairing would also dilute the benefits of Anglo's cost-cutting initiatives, which are expected to save $2 billion annually. Xstrata's zero-premium offer would have failed to compensate Anglo shareholders for that looming benefit, and in any event came nowhere near the going rate for successful mining mergers of about a 30% premium over market price.

The promptly thwarted advances from Xstrata fed immediate speculation about other potential suitors for Anglo American. Fresh from its own spurned bid to acquire a substantial stake in Rio Tinto (NYSE: RTP  ) , China's state-run Chinalco -- the parent company of Aluminum Corporation of China Limited (NYSE: ACH  ) -- could indeed be scouting for suitable investments. If Anglo's 942 million tons of iron ore reserves are in focus, then perhaps global leader Vale (NYSE: VALE  ) will take a gander now that a full year has passed since its failed bid for Xstrata.

In this small community of global megaminers, where it seems everyone makes a pass at everyone else in search of coveted economies of scale at one point or another, suitors had better place their best foot forward on the opening advance, or face a swift cold shoulder like the one Anglo turned to Xstrata.

Further Foolishness:

Megaminers like Xstrata and Anglo American look all over the world for the right places to invest. If you're interested in doing the same, consider a 30-day free trial with the Motley Fool Global Gains investment service.

Fool contributor Christopher Barker is the commodore of copper, and the Colonel Klink of zinc. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Anglo American, BHP Billiton, and Kinross Gold. The Motley Fool has a non-ferrous disclosure policy.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 927567, ~/Articles/ArticleHandler.aspx, 9/21/2014 12:11:17 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement