Determining the correct valuation terms for a deal like this is a minefield and opinions will vary widely. Diehard mining fans will claim that Xstrata is worth more than even the new higher terms. However, much depends on the timing of a deal like this and, given the long history between these two groups, raw numbers won’t tell the whole story. The commodity cycle has turned down in recent months and prospects for Xstrata, in particular, may be restrained until the global economic recovery is back on track. Given the announced governance structure amendments and the potential for operational synergies, shareholders of the new merged group should look forward to many years of satisfactory investment returns, even if it looks as if Xstrata is being bought slightly cheaply now.
Mike Franklin is a head of investment strategy at Beaufort International.
A “Glenstrata” merger is interesting due to the potentially higher production growth in its industrial assets over its peers, as well as its ability to invest alongside an ambitious, dynamic management team. However, this is not without risk. The new company will have higher financial leverage and more marginal operations in riskier geographies than its large-cap mining peers. It will also have significant exposure to an opaque marketing business, whose earnings have, at times, been more volatile than the industrial assets in its portfolio, although they have recently shown more resilience. The new company is also likely to pursue acquisitions aggressively. This has been a successful strategy for Xstrata through the bull market of the past decade, but may not be through a more subdued commodity price environment. The Glenstrata strategy has its own set of risks.
Nik Stanojevic is an equity analyst at Brewin Dolphin.