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Should You Buy Glencore and Xstrata Today?

By Royston Wild - Apr 25, 2013 at 3:31PM

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How attractive are the shares of Glencore International and Xstrata?

LONDON: I believe that giant commodities trader Glencore International (GLEN -0.17%) and mining leviathan Xstrata (LSE: XTA) are well-positioned to tread higher now that their protracted merger has received final approval.

Commodity prices remain extremely volatile given enduring uncertainty surrounding the macroeconomic environment, as recent swings in the gold price has demonstrated. Meanwhile, a number of metals markets are also facing the prospect of worsening oversupply in coming years, threatening the profitability of mining companies across the globe.

Despite this, I reckon that the tie-up between the two firms -- which is set for completion next month -- should yield exciting returns for investors, as cash flow balloons and earnings look set to march higher.

Company tie-up given final green light
Earlier this month, the companies received approval from China's regulator, MOFCOM, to complete their protracted tie-up that dates back to February 2012, with the sales process required to get under way within three months from mid-April. Glencore is expected to pay in the region of $30bn to complete the deal.

As part of the deal, Glencore will be asked to relinquish its stake in the Las Bambas copper project in Peru -- in which Xstrata is a key player in the site's development -- before the end of September next year, subject to a minimum price. This is likely to bolster the group's already-hefty cash pile to the tune of at least $5bn, according to industry estimates, easing any potential balance sheet pressure in the event of waning commodities demand.

As well, the ruling also requires the enlarged group to supply commodities-thirsty China with copper, zinc, and lead concentrate for an eight-year period, dating back to the start of 2013, with minimum copper shipments of 900,000 tonnes per annum attached to the deal.

Revenues and profit anticipated to climb
According to Liberum Capital, revenues from the combined group would rise 6.2% in 2013, to £261.3bn, driving attributable profit 5.5% higher to £5.8bn, and are expected to accelerate over the medium term. The broker has pencilled in turnover growth of 6.4%, to £278bn in 2013, and 1.5% to £282.1bn in 2014, driving adjusted profit 39.2% and 8.7% higher for these years, to £8bn and £8.7bn.

Recent heavy weakness in the share prices of both companies provides an excellent buying opportunity, in my opinion, underlined by Liberum's P/E estimates for coming years. A reading of 11.2 for 2013 is expected to fall to 8.1 and 7.4 for 2014 and 2015, respectively, according to the broker, and compares extremely favourably with a forward earnings multiple of 13.4 for the whole mining sector.

Dig for treasure with the Fool
Like all natural resources plays, Glencore International and Xstrata come attached with a heightened risk profile. Drilling for oil and minerals mining is often a "hit and miss" business where the timing, and indeed quantities, of potential payloads are extremely unpredictable.

To help you avoid these potential pitfalls, The Motley Fool's "How To Unearth Great Oil & Gas Shares" report gives an expert view on how to make a fortune from what lies under our feet. Click here now to download our totally free report.

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