Xstrata Dealmaker Davis Moves on Anglo to Compete With BHP, Rio

June 22 (Bloomberg) -- Xstrata Plc, the Swiss metals company that sold shares in London seven years ago, is seeking a merger with Anglo American Plc to create a mining group that would rival BHP Billiton Ltd., the world's largest.

Xstrata said yesterday it proposed to London-based Anglo a "merger of equals" that would lead to "substantial" cost savings. The combined company would have sales of more than $54 billion, based on 2008 figures, and produce commodities including copper, coal, iron ore and zinc.

Combining with Anglo would also be the largest deal yet for Xstrata Chief Executive Officer Mick Davis, who has spent more than $27 billion in six years to add copper production in Chile, nickel mines in Canada, coal in Australia and platinum in South Africa.

"Xstrata cannot go six months without doing a deal," said John Meyer, head of natural resources at investment bank Fairfax I.S. Plc in London. "The credit crunch put the brakes on them a bit, but here they are back again. This would be Mick Davis's biggest deal by far."

Talks are "at a very preliminary stage, and there is no certainty that any transaction will be forthcoming," Anglo said in a statement yesterday. Marc Ocskay, a spokesman for Glencore International AG, Xstrata's largest shareholder, declined to comment.

Anglo closed at 1,623 pence on the London Stock Exchange on June 19, giving it a market value of 21.4 billion pounds ($35.2 billion). Xstrata, which is based in Zug, closed at 681 pence, valuing it at 20.1 billion pounds. While Anglo has gained 5 percent this year, the worst-performing stock in the 14-member FTSE 350 Mining Index, Xstrata has advanced 88 percent.

Growth Potential

Founded by Ernest Oppenheimer in 1917 in Johannesburg, Anglo grew to become South Africa's biggest company during white rule as sanctions against apartheid limited its ability to expand outside the country. Anglo moved its headquarters to London in 1999.

"Anglo has high-quality, long-life assets, significant growth potential and a substantial opportunity to increase profit," said Anwar Wagner, a fund manager in Cape Town at Old Mutual Investment Group, which holds Anglo shares. "We think Anglo is very attractive, and it's cheap."

Anglo mines copper, coal and zinc in countries including Brazil, Venezuela and Australia. It controls Anglo Platinum Ltd., the world's biggest producer of the metal, and owns a 45 percent stake in De Beers, the largest diamond company.

The combined sales of Xstrata and Anglo would almost match those of London-based Rio Tinto Group, the world's third-largest mining company. Melbourne-based BHP had sales of $63.7 billion in the year to Dec. 31.

Cost Savings

The merger may save as much as $700 million a year by combining copper operations in Chile and coal mines in South Africa, Paul Cliff, an analyst at Nomura Securities Co. Ltd. in London, wrote in a May report.

"A more aggressive approach to production discipline at Anglo Platinum could effectively rebalance the platinum market and help drive higher prices." he wrote. Iron ore and platinum are "top of Xstrata's wish list," he added.

Davis, 51, a South African, worked as an accountant before joining Eskom Holdings Ltd., Africa's largest power supplier, in 1986 as executive director. In 1994, Davis was hired as finance director of South African miner Gencor Ltd., which later became Billiton Plc. He joined Xstrata after Billiton agreed to be acquired by Australia's BHP Ltd. to create BHP Billiton.

Xstrata sold shares to investors in London in 2002. It paid A$5.1 billion ($4.1 billion) for Australian copper and zinc producer M.I.M. Holdings Ltd. in 2003. Three years later, it bought Canadian nickel producer Falconbridge Ltd. for $18.1 billion.

Coal Acquisitions

Other deals include the acquisition of a third of the Cerrejon coal mine in Colombia for $1.71 billion in 2006 and the Tintaya copper mine in Peru for $750 billion in 2006. Its last acquisition was in March, when it paid $2 billion for Colombian coal assets from Glencore.

Still, not every transaction proposed by Davis has worked out. Xstrata broke off talks to be bought by Brazil's Vale SA, the world's biggest iron-ore exporter, in April last year after the companies couldn't agree on terms.

Xstrata abandoned a hostile bid for platinum producer Lonmin Plc in October after metal prices plunged. The company raised 4.1 billion pounds in a 2-for-1 rights offer in March to help it reduce net debt to $12.6 billion.

Dividend Suspended

Cynthia Carroll, who took over as Anglo's CEO in 2007, has continued with the reorganization started in 2005 by her predecessor Tony Trahar, selling stakes in units including AngloGold Ashanti Ltd., to focus on metals used by growing economies such as China. She suspended Anglo's dividend in February for the first time since World War II and announced plans to cut 19,000 jobs after metal prices fell.

"Cynthia Carroll is having a difficult time so she may consider a deal that would shake things up a bit," Fairfax's Meyer said. "For Xstrata, they get access to Anglo's premier assets."

Goldman Sachs Group Inc. and UBS AG are advising Anglo, while Deutsche Bank AG and JPMorgan Cazenove are advising Xstrata.