Last updated: February 8, 2010 10:35 pm

Xstrata sees ‘advantages’ in possible Glencore link-up

Xstrata, the mining company, has acknowledged that a merger with Glencore, the privately held commodities trader, could create value.

The prospect of a merger between the two companies, which, in Willy Strothotte, share a chairman, has been building in recent months, as Xstrata pursued deals to gain scale, while Glencore tapped capital markets.

“As the market looks around at possible options [for Xstrata and Glencore] that is one option they will be considering,” Mick Davis, chief executive of the Switzerland-based mining multinational, said. “There are great advantages to being able to see through Glencore’s trading capability, and cementing that relationship could enhance that advantage rather than detract from it,” he said.

A merger with Glencore was not under active consideration and Xstrata had reached a mature size from which it could focus on organic growth, he said. But Mr Davis added: “I know Glencore have thought about this.” Glencore declined to comment

Glencore, based in a Swiss village near Xstrata’s head office, owns 34 per cent of Xstrata and already markets some of the mining company’s output.

Speculation about a merger has followed Xstrata since its 2002 flotation, in which Glencore’s Australian and South African coal assets were spun off. Mr Davis agreed to buy the assets after taking over a minor Swiss mining company. In December, Glencore launched a $2.2bn convertible bond that lured some of the biggest names in the resources industry and also provided confirmation that the company was willing to take on new shareholders.

“Glencore’s problem is that the partners are constrained from monetising their ownership,” said a banker familiar with the company. “They can’t pay out hundreds of millions of dollars [to retiring partners] without threatening the bottom line. A flotation would be one way to get around that.”

A merger with London-listed Xstrata would be another way to go public.

A test of any merger will come next month when Glencore has to decide whether to buy back its Prodeco coal mine from Xstrata. Analysts believe if Glencore exercises its buy-back option, a merger is unlikely.

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