Just when you thought the specter of last year's commodities price collapse and the over-priced dealmaking that preceded it would keep mining consolidation on hold, along comes Swiss giant Xstrata to spice things up again.
With memories of last year's ditched bid for London-based platinum miner Lonmin still fresh in Xstrata's corporate mind, the preliminary discussions under way with rival Anglo American
If such a deal materializes, the combined company would sport a market capitalization of about $65 billion, control about 11% of the world's metallurgical coal supply, and become a massive force in copper and other base metals.
Although global markets for commodities have stabilized somewhat from their worst levels of 2008, both Xstrata and Anglo American have emerged with substantial debt and distressed investments. Like rival Teck Cominco
Although a combination would bolster economies of scale in their mining operations, creating estimated synergies of about $1 billion per year, the move would also create a company with a combined debt balance in the neighborhood of $32 billion.
Now that Rio Tinto
Two additional red flags jump out at this Fool from the perspective of Anglo American shareholders. First, Anglo American has made strides to improve its liquidity position through a sweeping cost-reduction plan, expected to save $2 billion per year. Combining the companies before those changes take effect would effectively dilute the benefit to existing shareholders. Second, since Xstrata does not trade on a U.S. exchange, this Fool wonders whether shares of the combined company would be available to U.S. investors, or whether those shares would be converted to cash. I am wary of deals that bar investors from following their assets forward.
We have barely scratched the surface in analyzing a deal of this magnitude, so please stay tuned for continuing coverage.