SOUTHERN COMFORT: SMI and the merger between Glencore and Xstrata

GENERAL SANTOS CITY (MindaNews/06 February) — Although its has been the buzz in the international mining community for some time, the proposed ‘merger of equals’ between Glencore International and Xstrata Plc is reaching feverish pitch this week as it appears the union is heading towards fruition except for some issues on premiums.

Under the merger proposal, Glencore and Xstrata could end up among the world’s top mining companies in the world as the deal is reportedly worth well over US$80 billion.  The merger will reportedly be announced next week, according to the latest development.

The deal will be the largest of such magnitude since Rio Tinto of Brazil took over Alcan in 2007.  The merged company is poised to become the third largest mining corporation in the world, next only to BHP Billiton and Rio Tinto.

Glencore is one of the world’s largest integrated producers and commodities trading firms but is also into mining while Xstrata is the world’s fourth largest producer of copper.

It owns 34 percent of Xstrata Plc.

Both companies are no strangers in the Philippine mining industry.

A merger between the two giant companies will have immediate and strategic impact on the mining sector in the country as SMI will be in the better position to wrest control over copper production and trading in the country.  It could also result into Xstrata Plc finally taking full and 100 per cent control of SMI as Glencore could end up buying SMI minority shareholder Indophil Resources NL which owns the rest of the 37.5 per cent of the Tampakan mining company.

Glencore was founded by March Rich, a former fugitive financier who was wanted in the US for tax evasion.  He was pardoned by then outgoing US President Bill Clinton in what many believed was an eleventh-hour act of the president.  There are, however, reports indicating that Rich was a former CIA agent or at least a contact in the CIA’s espionage ring.

Glencore owns 78.2 per cent of Pasar, the only copper smelting plant in country, while Xstrata Plc controls 62.5 per cent of Sagittarius Mines Inc., holder of the Tampakan Copper and Gold project.  The London-based Glencore acquired PASAR in 1999.

Glencore was once a controversial trading firm but its ‘veil of secrecy’, as a local mining observer said, is now gone after it became a publicly listed company in London last year.

In 2007, Xstrata exercised its option to acquire majority stake at SMI.

At the time, Filipino-owned Alsons Development Inc. (Aldevinco) owned five percent of SMI.  Aldevinco has since turned over its minority shares to Indophil.

Last year, however, Alsons Power Holding Corporations (AHPC), sister company of Aldevinco, increased its stake at Indophil to 19.99 after a failed attempt to acquire the minority stake of the Australian exploration company.  Xstrata, which also owns 19.99 percent of Indophil, reportedly blocked the attempt of the Filipino group to acquire the 37.5 minority share in SMI.

The intricate web of corporate wars in SMI has largely been ignored and unreported in the local press.

But this could also have strategic impact and implication on future of SMI.

In January, the Department of Environment and Natural Resources denied the application of SMI for an environment compliance certificate citing an existing provincial ordinance banning open-pit mining in South Cotabato.

SMI has since filed an appeal hoping a reversal will keep it on track for its 2016 target for commercial production.

SMI however will also have to wait for the outcome of the proposed merger between Glencore and its mother company as well as its future partnership with Indophil.

The road ahead is not getting any smoother.  The bumps are getting rougher for SMI. (MindaViews is the opinion section of MindaNews. Edwin G. Espejo writes for the