The consolidation of the global natural resources industry in response to the bursting of the the commodities bubble of the early years of the decade and the subsequent global recession means one of two things: more joint ventures such as the one between BHP Billiton and Rio Tinto in iron ore or more combinations within a limited group of companies who need global economies of scale.
The collapse of Chinalco’s proposed $19.5 billion investment in Rio earlier this month makes it a potential bidder for either Anglo American or Xstrata, who have embarked on a merger dance of their own. Anglo’s iron ore, platinum, coal and copper assets make it the better prize for Chinalco. Xstrata’s scrappy entrepreneurial management style would sit uncomfortably with the state-controlled giant, making the Swiss-based company a more natural partner for Brazil’s Vale. Chinalco would also be better placed to circumvent the labour and monopoly concerns the South African government has raised that any bidder for Anglo will have to deal with.
Chinalco, though, will have to come up with a deal that values Anglo at somewhere upwards of $45 billion. Anglo shareholders have already rejected Xstrata’s no premium bid, and a 30% premium is the benchmark for successful mining industry mergers. Anglo’s current market capitalisation is $35 billion. Nor would Chinalco be likely to be able to squeeze out the $700 million-1.5 billion of cost savings (taxed and capitalised worth $3 billion-6 billion) that Xstrata sees in Anglo that could justify a lower bid price.