London: Qatar is demanding another $4.2 billion (Dh15.43 billion) from Glencore International Plc for Xstrata Plc at the same time that analysts are reducing profit estimates for the Swiss mining company faster than its peers.
Xstrata, due to report first-half earnings on August 7, will post a 39 per cent drop in net income for 2012 to $3.5 billion, according to the average of seven estimates compiled by Bloomberg in the past month. The analysts have cut their projections by an average 25 per cent, or $1.2 billion, in the last 28 days. Glencore’s profit will fall 2.7 per cent for the year, according to six analyst estimates made in that period.
Glencore’s £17 billion (Dh97.26 billion) all-share offer was derailed when Qatar’s sovereign wealth fund, the second-largest holder, said last month it wanted the bid raised by 16 per cent. Xstrata is the biggest exporter of utility-grade coal. Prices for the fuel “collapsed” in the second quarter, according to Credit Suisse Group AG, slumping about 17 per cent.
“The weakness in thermal coal markets this year has been very surprising to most analysts,” Jeff Largey, a mining analyst at Macquarie Group Ltd. in London, said. “It makes it harder to justify a bigger premium if it looks like Xstrata’s earnings are the relatively weaker set of the pair. It gives Glencore a better position from a bargaining point of view.”
Qatar Holding LLC, owner of about 11 per cent of Xstrata, surprised analysts and investors two weeks ago by calling for this year’s biggest takeover offer to be raised. Glencore has offered 2.8 of its shares for each one in Xstrata, seeking the 66 per cent it doesn’t already own.
Xstrata’s value
An offer at 3.25 “would provide a more appropriate distribution of benefits of the merger whilst properly recognising the intrinsic stand-alone value of Xstrata,” the Qatar fund said on June 26. The fund, advised by Lazard Ltd., has built its stake in Zug, Switzerland-based Xstrata at a cost of about $4.3 billion.
Officials for Xstrata, Baar, Switzerland-based Glencore, and Qatar Holding declined to comment.
Xstrata shares traded as high as 2.85 times to Glencore’s in London on March 2. The ratio dipped as low as 2.58 on June 25 and was at 2.67 yesterday.
Fair value for a transaction would be a ratio of 3.4 to 3.8 Glencore shares for each one in Xstrata, Exane BNP Paribas analyst Sylvain Brunet wrote in a report yesterday. Brunet cut his 2012 earnings estimate for Xstrata by 13 per cent because of the drop in coal prices.
Qatari negotiations
“Thermal coal prices are very low at the moment, but it doesn’t mean it’s low in perpetuity,” Andrew Keen, an analyst at HSBC Holdings Plc in London, said by phone. “That’s overplayed by the market. At the moment, the Qataris are essentially controlling the vote. The ratio will be really a function of the negotiation between Glencore and Qatar.”
Thermal coal prices at the Australian port of Newcastle, the benchmark for Asia, averaged $95 a ton in the second quarter. That was 23 per cent lower than the 2011 average of $123 a ton.
“Concerns about the ongoing problems in the Eurozone and the Chinese government’s reduced forecast of economic growth have resulted in deteriorating sentiment,” Xstrata said in a May 31 assessment of its markets, in which it cited declines in metals and coal prices since the start of 2012.
Xstrata will get about a third of its earnings before interest, tax, depreciation and amortization from coal in 2012, according to Macquarie’s Largey, who has cut his 2012 per-share earnings estimate for the company by 17 per cent and by 9 per cent for 2013. About 42 per cent of Ebitda comes from copper, Largey said.
Seaborne coal
“Xstrata has by far the most exposure to seaborne thermal coal,” Christopher LaFemina and Seth Rosenfeld, London-based Jefferies Group Inc. analysts, said on July 9. It derives about 29 per cent of its sales from the fuel. “As a result of its high leverage to the seaborne thermal coal price and its relatively high financial leverage, Xstrata has recently suffered very significant mark-to-market earnings downgrades.”
Xstrata advanced 2.8 per cent to 846.8 pence yesterday in London. Glencore rose 2.3 per cent to 316.65 pence.
Glencore and Xstrata have set September 7 as the date for postponed shareholder votes on the deal that were originally scheduled for this week. Qatar’s acceptance is critical to the transaction’s success, given that just 16.48 per cent of opposing Xstrata investors can block it.
