Xstrata 2.0 (or what Mick did next) | FT Alphaville

Xstrata 2.0 (or what Mick did next)

What now for Xstrata CEO Mick ‘The Miner’ Davis?

Bloomberg thinks it has the answer:

Xstrata (XTA) Plc Chief Executive Officer Mick Davis and Chief Financial Officer Trevor Reid are weighing plans to set up a privately backed mining fund after Glencore International Plc (GLEN) takes over their company, people familiar with the matter said. The fund would probably buy the undeveloped resources that major mining companies are looking to sell, the people said, asking not to be identified before a public announcement. While the plans aren’t final, Davis and Reid would likely search for investors in emerging markets and the Middle East, they said.

Unsurprisingly the story drew a testy “no comment” from Xstrata.

We say unsurprising because…

1) Xstrata’s ‘merger’ with Glencore has yet to be consummated (thank you China)

2) Mick the Miner has pledged to run the combined commodities/mining behemoth for six months before handing the reins to Ivan Glasenberg.

So he couldn’t possibly planning anything else. Could he?

But if Mick The Miner isn’t considering Xstrata 2.0 (and frankly that seems unlikely) then he should be. As the mining sector looks to consolidate after years of extravagant spending and bold deals, mining assets worth tens of billions of dollars could hit the market.

For example, BHP Billiton and Rio Tinto alone could sell $US35bn of assets over the next couple of years as they look to pay down debt and retain their prized single-A credit ratings, say Deutsche Bank mining analysts Paul Young and Rob Clifford.

In a detailed piece of analysis the Deutsche duo have examined the portfolios of both companies and concluded that BHP could offload US$25bn and Rio US$10bn of non core respectively.

The majors have moved into consolidation mode, clearly marked by the change in CEOs. With Rio recently moved to negative credit watch and BHPB unlikely to reduce gearing for at least 12-18 months, asset sales are required to reduce debt. We think new management will not be tied to optionality and will clear out non-core assets with little hesitation.

We now expect both companies to move quickly on asset sales. In Rio’s case we think there are US$8.6b of operations that could be sold including Diamonds, IOC, Pac Al, Eagle Nickel and other non core aluminium assets. BHP has US$18.9b worth of non-core assets that could be sold including the aluminium, Alumar alumina, and thermal coal assets, Nickel West, manganese, non-core oil assets (such as Pakistan, Trinidad and Tobago, Algeria) and Pinto Valley copper.

Here’s the non core asset disposal menu.

Rio Tinto:

 

BHP Billiton:

As you can see there’s plenty for Mick to pick over.

But what’s also worth highlighting is the potential for strategic sell downs. By which Deutsche means BHP joining forces with a partner to help develop, for example, the US$30bn+ expansion of its Olympic Dam copper/gold mine in South Australia.

Bringing partners into the large longer dated projects such as Olympic Dam (copper/uranium), Jansen (potash) and Scarborough/Thebe (WA gas) could net another US$4.3b for BHPB if 20% of these projects are sold. The timing will be driven by project studies and economics, but we believe a strategic sell-down of Jansen could occur in FY14 and Olympic Dam and Scarborough/Thebe in FY16.

This is the sort of the thing the oil and gas industry has been doing for years, particularly in the big Australian LNG projects. And one has to think it’s a trend that could catch on among the cash strapped mining majors.

On which note it’s back to Young and Clifford for a final word:

When we look at the cash generation vs. the capex and dividend commitments of the two, the urgency and need to divest assets becomes more apparent. As can be seen from the cash flow charts below, BHPB is spending more on capex than it is generating this year (FY13 capex guidance is US$22b) and when you add dividend payments into the mix, it is living beyond its means for some years to come. BHPB management has indicated that FY14 capex will be lower than FY13 (we model US$18.5b) and they “will re-prioritize capex again with the upcoming budget review”.

Rio is also living beyond its means, but corrects this by 2014 with capex peaking at US$17.5b in 2012 and then dropping to US$14b in 2013. Guidance remains at c. US$13b for CY13 (100% basis), but we expect additional mine capex to be approved for Pilbara expansion to 360m tonnes.

Update:
Looks like the wheels are already in motion at BHP.

From the Weekend Australian:

BHP Billiton has more than 10 assets on the chopping block — believed to include coal interests in Australia and oil and gas holdings offshore — which would add substantially to the $US4.47 billion raised from the sale of four assets since last August.

In closed briefings to sell-side analysts this week, BHP chief financial officer Graham Kerr said BHP’s divestment program was focusing on at least 10 assets. The Weekend Australian later confirmed the comment with BHP. While Mr Kerr did not name the specific assets, BHP recently announced the potential divestment of the Gregory-Crinum coal mining operation in Queensland.

Related links:
Xstrata exits after decade of two halves – FT
Has Ivan started drinking what Mick was drinking? – FT Alphaville