Can Xstrata survive Glencore’s bear hug? – by Emma Rowley and Helia Ebrahimi (The Telegraph – August 4, 2012)

http://www.telegraph.co.uk/

With mining giant Xstrata set to reveal falling profits this week, questions are being asked whether its mega-deal with Glencore will ever happen.

All is not well in Mayfair. High above the streams of shoppers and tourists, the hedge fund managers are growing nervous as they sit in their quiet offices. The problem is the radio silence around the deal of the year, the planned tie-up of the FTSE 100’s Glencore and Xstrata, the commodity trading giant and the mining giant.

But could it be that all those carefully constructed trades, based on the premise that mining’s biggest deal yet – years in the making and expected by everyone – would take place, will in fact unravel? “We thought it was going to happen, it seemed pretty certain, and now… we’re not so sure,” was the nervous comment from one hedge-funder.

He and many others will be holding their breath on Tuesday, when Xstrata updates the markets on its trading for the first half of the year. The figures will reignite the debate around the company’s worth and the merits of Glencore’s offer. The results could shift the balance of power in negotiations around the deal of the year.
 
Currently enjoying the whip hand is Qatar Holding, the sovereign wealth vehicle for the oil-rich emirate, which has been steadily increasing its stake in Xstrata to over 11pc.
 
September 7 is the new date for the reconvened shareholder meetings to vote on the deal. It was hastily rearranged after the Qataris’ shock demand in June that Glencore up its offer, ending their reputation as passive investors in one fell swoop. The Qataris argue that Glencore should offer 3.25 of its own shares for each Xstrata share held, rather than the 2.8 on the table.
 
Put bluntly, if Xstrata’s results are poor, they will strengthen Glencore’s case that it is offering Xstrata shareholders a fair deal. If they are strong, the commodity trader will remain under heavy pressure from the Qataris to up its offer.
 
No one is expecting a stellar set of numbers from Xstrata. The consensus is that the miner will report that profits fell against a souring global economic backdrop, as China’s growth slows and the eurozone crisis flares up once more.
 
The whole resource sector has seen share prices suffering from poor investment sentiment, but Xstrata has been particularly hard hit through its exposure to thermal coal, used in power stations, which has underperformed against other commodities.

Given this turmoil in the commodities markets, the City is expecting Xstrata to report first-half profits of $1.4bn, a 50pc fall on a year earlier. That will come on the back of underlying earnings of $3.9bn, a near 44pc year-on-year drop.
 
On the upside for investors, production numbers out last week from Xstrata held no nasty surprises, even lifting the miner in early trading on Tuesday before it closed up a modest 0.4pc.
 
In recent weeks, analysts think thermal coal prices have bottomed out, offering support to Xstrata as the world’s largest exporter of the fuel. Also on the plus side, the second half of the year is expected to show a significant boost from Xstrata’s copper projects, currently in development, as they come on line. As the analysts at Liberum argue, the big question mark around Xstrata’s results is whether they will throw up any updates across its coal, copper and nickel projects as investors weigh up the respective value of the two companies’ project pipelines.

For the rest of this article, please go to The Telegraph website: http://www.telegraph.co.uk/finance/newsbysector/industry/mining/9452171/Can-Xstrata-survive-Glencores-bear-hug.html