Three's a crowd for Glencore

Qatar Holding is biding its time to get the best deal from Glencore in the trader's planned mega-merger with Xstrata. And with time not on Glencore's side, a compromise is on the cards.

Xstrata has had a tank on its lawn since listing a decade ago: Glencore, its biggest investor, with 34 per cent.

Now Qatar Holding has rolled up as well, with over 11 per cent.

But the sovereign wealth fund is pointing at Glencore: Qatar knows that the miner-cum-trader, determined to pull off a merger of equals with Xstrata, cannot vote its own shares.

Since 75 per cent of Xstrata’s other investors are needed to approve the deal, the Qataris need only a few allies to hit the 16.4 per cent level required to block it.

Glencore is, so far, resisting improving its merger ratio of 2.8 of its shares for every Xstrata share; the Qataris are holding out for 3.25.

The stand-off could yet destroy the merger plan, as a share price ratio below 2.7 now suggests. Investors vote on the merger on September 7.

First-half results from Xstrata yesterday suggest that Glencore is right to dig in. Falling coal, nickel, zinc and especially copper prices accounted for Xstrata’s near one-third fall in operating profit to $4 billion from a year ago. Input cost inflation is also hurting.

Moreover, Xstrata has deferred $1 billion of capital expenditure until next year and beyond. It has slashed costs, too.

But the 8 per cent increase in interim dividend is counterintuitive. True, Xstrata’s capex cycle peaks this year and, with gearing of 19 per cent, it has room to fund growth capex with debt. But downturns invariably ambush miners.

And Glencore should note that the dividend jumps the gun on expected increases in Xstrata’s cash flow from lower-cost production due to come on stream this year and next. Copper output is set to grow at a compound rate of 12 per cent to the end of 2015, for example.

Trailing the market and mining peers since the deal was announced in February, weak commodity prices and merger uncertainty are weighing on Xstrata’s share price. The slow-burn merger plays into the hands of the Qataris, who are in no rush.

Trouble is, Glencore is. It must bag the miner before production ramps up. A truce at 3 looks more compelling by the day.

Copyright The Financial Times Limited 2012.

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