Money Matters - Simplified

Xstrata seeks merger with Anglo American

Xstrata's move to merge with Anglo American underscores the pressures that miners are facing to cut costs and keep pace with the fall in prices as a result of the economic slump

Cape Town, South Africa, June 22: In talks that are said to be at a preliminary stage, Anglo-Swiss miner Xstrata PLC (LSE: XTA; TSX: FAL) has made a gallant merger attempt with rival Anglo American PLC (LSE: AAL; JSE: ANGLO; NYSE: AAUK).

Xstrata said of the possible synergies between the two companies, “A merger of these two world-class companies with complementary assets is highly compelling” and would provide “enhanced scale and financial flexibility to fund future growth.”

Merger of equals
The London-based Anglo American, founded in Johannesburg in 1917, is a major investor in South African mining. Switzerland based Xstrata, on the other hand, is the third-largest exporter of coal and the biggest operator of ferrochrome smelters in South Africa.

The alliance would enable Xstrata to cut costs by joining contiguous operations and doing away with overlapping assets.

Behemoth in the making
If this merger of equals sees the light of the day, the combine entity would have a market value of over $65 billion. The entity would thus topple the British multinational mining company Rio Tinto (ASX: RIO, LSE: RIO, NYSE: RTP) as the world's third-largest miner based on the criterion of market value.

As on date, the two companies, put together, control most of the South Africa’s platinum industry. Sandile Nogxina, the director general of South Africa’s mines department, said, “We will request a meeting, this is something very big. It’s likely to change the industry.”

The combined entity would lay claim to being the world's biggest provider of diamonds, platinum, chrome and zinc. It will also be the second-largest copper producer after Chilean state owned Codelco.

Although the merger status is at a elementary stage and the move faces steep stumbling blocks, people familiar with the matter disclosed that the chief executive of Xstrata, Mick Davis, would be at the helm of the combined entity, which would be equally owned by both companies' shareholders.