Glencore sees gold in BHP's rusty nickel

One of the problems confronting the big miners as they try to reshape their portfolios for a post-boom environment has been the paucity of buyers for their least-loved assets. That may be changing.

While announcing a better-than-expected $US4.6 billion profit for 2013 overnight, Glencore Xstrata’s Ivan Glasenberg made it clear that, with synergies from the merger of Glencore and Xstrata running ahead of guidance, the group is back on the prowl for acquisitions and deals.

Glencore teamed with Macquarie in a losing bid for Shell’s Australian assets, which Swiss-based trader Vitol acquired for $2.9bn. Glasenberg said the group was also looking at Shell’s Nigerian oil assets, BHP Billiton’s Nickel West business and was talking to Rio Tinto about potential co-operation to extract synergies from their Australian coal portfolios.

The most obvious Australian deal for Glencore would be to acquire BHP’s nickel business, which is close to Glencore’s own West Australian nickel operation.

Nickel has been a difficult commodity for BHP Billiton, both at an operational level and because of depressed prices. BHP said in its recent half-yearly report that the nickel price was 17 per cent lower in the December half than for the previous corresponding period.

Nickel is grouped with aluminium and manganese within BHP’s structure and the unit, which lost $US108 million at an earnings before interest and tax level in the first half of 2011-12, earned a modest $US148 million in the latest half.

BHP has written down the value of the Nickel West business heavily in recent years, to about $US600 million. It also has the Cerro Matoso mine in Colombia, one of the world’s biggest nickel producers. It has net operating assets valued at $US937 million in BHP’s books.

In recent years the businesses have been run more for cash than profit and it is quite apparent that they don’t fit the criteria of the ‘four pillar’ assets -- iron ore, copper, petroleum and coal -- that chief executive Andrew Mackenzie wants the group to focus on. If BHP could exit them on half-reasonable terms it would.

Glasenberg isn’t the only potential buyer. Former Xstrata chief executive, the acquisitive Mick Davis, is also reportedly eyeing the nickel business for his new vehicle, X2 Resources. While the near-term outlook for the price isn’t particularly optimistic, there is a view among analysts that its prospects will strengthen towards the latter years of the decade.

If the BHP Billitons and Rio Tintos of the sector are to reshape their portfolios, rather than solely focus on lowering costs and rationing capital, they need a functioning market for resource assets.

Glasenberg last year made it clear that he wasn’t keen on greenfields expansion but the more recent aggression shown by Glencore suggests that it is increasingly interested in acquiring assets devalued by the downturn in the resource sector cycle. Glencore, via its trading businesses, does have the opportunity to add a layer of profitability to any commodities play.

Mick Davis, who made his name through an aggressive acquisition program in the pre-boom period -- and built Xstrata from nothing into a major mining house in the process -- could also be expected to pursue a counter-cyclical strategy.

There’s been a lot of speculation about the potential for private equity and other opportunistic players to buy unwanted base metal and coal assets cheaply, attack their cost structures and make a lot of money when the commodity price cycle stabilises as the sharp cutback in new investment is eventually reflected in a better balance between supply and demand.

That hasn’t yet eventuated but if groups like Glencore and X2 do start moving, it would send a broader signal of their confidence that a stronger outlook for the sector is in prospect.