Xstrata’s Overture

Mega-merger talk kicked up again at the end of the 24th trading week of the year, as Xstrata unveiled its desire for a “merger of equals” with Anglo American.

• Remarkably, the current combined market cap of Xstrata and Anglo is only US$65 billion, still in fourth spot behind Rio Tinto at US$69 billion, Vale at US$89 billion, and BHP at US$148 billion.

(The remaining big Western miners fall well behind the pack in market cap: Barrick, US$28 billion; Potash Corp. of Sask., US$26 billion; Freeport-McMoRan Copper & Gold, US$19 billion; Alcoa, US$10 billion; and Cameco, US$10 billion.)

These merger-of-equals proposals work best when one management team is frisky and ambitious, and the other is worn out or feels it’s peaked in terms of corporate accomplishments. Then the physical assets can be combined on an equal footing with one intact management team coming to the fore, ideally incorporating the top people from the fading management team.

Not surprisingly then, given its still-lively executive team led by the dynamic American Cynthia Carroll, Anglo’s directors unanimously rejected Xstrata’s merger idea the next day, and said they wouldn’t even hold exploratory talks.

There’s probably an unconscious element of snobbery in the quick snub, too: why would such a storied and venerable entity as Anglo American want to hitch up with an upstart company that has a trendy “X” in its name and didn’t even exist a few years ago?

Meanwhile, the South African government is none too keen to see major job losses if Anglo and Xstrata’s many operations there are combined and rationalized.

A merger looks compelling on paper, with many seeing it as pairing Anglo’s superior assets with Xstrata’s superior managers. The latter, led by M&A junkie Mick Davis, have never really failed in all their elaborate corporate manoeuvrings over the past few years, so this makes us think this is the opening move of a longer wooing attempt.

The wild card is Vale resuming its efforts to acquire Xstrata, though the Brazilian seems to have become less ambitious on the M&A side and has plenty of internal growth projects in the pipeline to keep it busy.

• Peruvian President Alan Garcia was forced to suspend the introduction of laws that would have allowed oil and gas and mining companies greater access to remote areas of the country. Things came to a head on June 5, when a pitched battle exploded as police moved in to clear some 2,000 Aguaruna and Wampi Indians from a highway near Bagua Grande, 1,400 km north of Lima.

Garcia says 32 people were killed, 23 of them police officers. Some foreign press and NGOs have tried to portray this incident as “the Amazon’s Tiananmen,” but these were not innocent, peaceful Indians — they have been whipped up into violence by a strong leftist influence and NGOs.

The fallout from the incident reached the top levels of Garcia’s foreign investor-friendly government. His new left-leaning Prime Minister Yehude Simon is stepping down temporarily in protest, joining populist minister Carmen Vildoso. However, Simon isn’t going too far: he remains the lead negotiator between the government and protesters.

Garcia’s approval ratings have plummeted to 9% in recent polling and he looks to be permanently weakened for the rest of his term. More protests are sprouting up beyond the Amazon basin, as peasant and indigenous groups say his government hasn’t helped them enough in light of the mining boom of recent years.

• American magicians Penn and Teller memorably describe the Las Vegas strip as being a spectacular monument to people who are lousy at math, and the same could be said for a few mining promoters’ mansions in Canada.

A particularly laughable example of this kind of mathematical magic is seen in Appleton Exploration’s promotion of its Malian gold play. The second sentence in its recent press release reads: “MDL-09- 056 has returned 192 grams per tonnes Au (6.17 oz/t) over a 10 metre quartz rich zone including 640 gpt Au (20.58 oz/t) over 3 metres.”

But wait a sec here, folks. Break out your calculator and you’ll find that 3 metres of 640-gram material combined with 7 metres of completely barren rock (i. e. 0 gram gold per tonne) equals exactly 192 grams over 10 metres.

But why stop the fun there? By the same math, this hole returned 19.2 grams over 100 metres, or 1.92 grams over 1 km, or 0.192 gram over 10 km. You get the picture. Now check out our latest short position table and guess who’s recently joined it.

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