Diversified miner
Xstrata is offering A$6.35 (about US$4.73) in cash per WMC share, valuing WMC at US$5.9 billion.
The offer represents a hefty premium of 25% and 29% to the volume-weighted average price for WMC shares over the past three and six months, respectively, and a 29% premium to WMC’s closing price on Oct. 26 (the day before the bid). One unusual twist is that Xstrata expects to fund its offer fully by tapping into the debt markets. At mid-2004, the company already had US$1.8 billion in net debt, giving it a 25% net-debt-to-equity gearing.
“The combination of these two businesses would create a world-class diversified mining group with greater scale to compete across global markets and excellent growth potential,” says Xstrata CEO Michael Davis. “Our offer price fully reflects the value of WMC in the current high commodity price environment, the operational improvements under way at both Olympic Dam and the nickel operations, as well as the growth potential of WMC’s assets as part of a larger group.”
Davis adds that the price includes material value associated with operational synergies at Mount Isa (co-owned by the two, but operated by Xstrata), cash benefits that flow from Xstrata’s financial structure, and potential cost savings from slimmed-down corporate overheads and efficiency improvements at operations.
WMC is not nearly so keen, saying its board has “carefully considered the proposal and determined that it fails to recognize the current and prospective value of WMC’s assets and the strategic benefits to Xstrata or other potential acquirers.”
As a result, the WMC board is declining to put the proposal forward to its shareholders, but the company says it is still willing to have further discussions with Xstrata. These discussions could be face-to-face: Davis plans to travel to Australia in mid-November, with Melbourne, Sydney and Brisbane on his itinerary.
The immediate market response on Oct. 27 to Xstrata’s offer was dramatic: WMC’s ADRs (worth 4 shares apiece) soared US$4.87, or 31.5%, to US$20.35 in New York trading, while Xstrata dropped 59 pence, or 6.6%, to 8.39 in London trading. At presstime on Nov. 2, WMC was trading at US$20.26 while Xstrata was steady at 8.53.
While not exactly a household name, Xstrata has emerged as one of the world’s largest mining companies following its purchase of
Xstrata now has its hand in six major commodity markets — copper, coking coal, thermal coal, ferrochrome, vanadium and zinc — and has additional exposure to gold, lead and silver. The company has operations in Australia, South Africa, Spain, Germany, Argentina and the U.K.
Xstrata’s coal division alone has interests in more than 30 mines in Australia and South Africa, and employs around 10,000 people, including contractors.
Xstrata’s copper business is headquartered in Brisbane, Australia, and operates mines and processing plants in northern Queensland. It also holds a half-interest in Alumbrera, an open-pit copper-gold mine in Argentina.
The slightly scratched jewel in WMC’s crown is its Olympic Dam copper-uranium mine in South Australia. Olympic Dam is the world’s eighth-largest copper deposit and the largest known uranium deposit, accounting for some 30% of the world’s uranium resources.
The mine ranks as Australia’s largest underground mine and mineral processing operation, with an annual production capacity of 235,000 tonnes copper, 4,500 tonnes uranium, and 100,000 oz. gold. In recent years, however, the operation has been plagued by various technical problems, which have required shutdowns, reconstruction and cash infusions.
WMC is now studying whether it should spend A$2-4 billion to double the capacity of the mine by the end of the decade and make Olympic Dam the world’s largest uranium producer.
CEO Andrew Michelmore says WMC’s ongoing technical work and drilling “suggest that either massive underground mining techniques or an internationally competitive cost base for open-pit operations are very viable options.”
Although the Xstrata bid could derail its schedule, WMC expects to make a decision on the preferred mining method at Olympic Dam early in 2005, and complete a full development study in early 2006.
WMC produces nickel in Western Australia at Leinster and Mt Keith. It has a nickel concentrator at Kambalda, a nickel smelter at Kalgoorlie, and a nickel refinery in Kwinana.
In 2002, WMC produced 106,423 tonnes nickel-in-concentrate, or, in another measure, 91,574 tonnes nickel-in-matte, representing about 8% of global output.
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