Swiss miner Xstrata has approached Anglo American with a proposal for a merger of equals. A tie-up between the two would result in the world's third-largest miner, with a market capitalisation of around $68 billion based on recent share prices. The combined entity would be the world's largest coal, platinum, and zinc miner, as well as the second-largest copper producer, behind the Chilean government firm Coldeco. The deal could result in some economies of scale, given that the firms have several platinum operations in South Africa in close proximity to one another and presently share copper mines in South America.
The offer comes at a time when many Anglo shareholders are somewhat disgruntled, feeling burned by the dividend cut earlier this year and upset that CEO Cynthia Carroll's cost-cutting programmes have yet to offset the negatives stemming from recent pricey acquisitions. Likewise, Xstrata CEO Mick Davis is under similar pressures to rein in costs at operations.
If Xstrata, or another miner, is able to make an enticing offer, Anglo may indeed agree to be absorbed by one of its peers. Other bidders could include Vale, which attempted to purchase Xstrata last year but could not come to terms with Xstrata's major shareholder, commodity trading firm Glencore, over the marketing of Xstrata's products. Anglo's assets would immediately bolster Vale's positions in coal and copper, both of which are of strategic importance to the Brazilian firm. We are leaving our fair value estimate for Anglo unchanged for now and will be watching the negotiations closely.