After a rather long back-and-forth with Chinese regulatory authorities, Swiss commodities conglomerate Glencore International PLC, St. Helier (OTCMKTS:GLCNF) has finally received the country’s blessing to consummate its planned merger with Swiss mining company XSTRATA PLC ADR (OTCMKTS:XSRAY). Valued at $30 billion, the deal is one of the sector’s largest-ever tie-ups and promises to reorder the way in which several key commodities are mined and sold in the Asia-Pacific region. Based on Glencore International PLC, St. Helier (OTCMKTS:GLCNF)’s 2012 intake of about $214 billion and XSTRATA PLC ADR (OTCMKTS:XSRAY)’s 2012 revenues of more than $31 billion, the combined company is expected to have full-year revenues in the neighborhood of $245 billion.
In light of the deal’s massive size, Chinese regulators’ concerns should not come as a surprise to investors. However, Glencore International PLC, St. Helier (OTCMKTS:GLCNF)’s troubles do offer a glimpse into the thinking of the often-opaque Chinese regulatory apparatus. While this deal certainly offers a significant potential for profit, it should also serve as a useful framework through which investors can view other blockbuster mergers that involve Chinese assets or interests.
Glencore and Xstrata at a Glance
Glencore International PLC, St. Helier (OTCMKTS:GLCNF) is a diversified miner and commodities transporter that operates on a global basis. In addition to metals like copper, aluminum and zinc, the company also manages and transports stockpiles of energy resources like oil and natural gas. It also maintains a small but significant agricultural products division that manages stockpiles of grains, cotton, sugar and other products. Examples of competitors within these other industries can be found here.
XSTRATA PLC ADR (OTCMKTS:XSRAY) is a more narrowly focused concern that deals with the extraction and processing of various metals like cobalt, nickel, zinc, iron, gold and lead. Like Glencore International PLC, St. Helier (OTCMKTS:GLCNF), Xstrata also maintains a coking operation that extracts and processes coal from mines around the world. It operates mines and processing facilities on every continent except Antarctica.
Comparisons with Competitors
As global mineral resources firms, these companies have several high-profile competitors. First among these is Rio Tinto plc (NYSE:RIO), a British mining conglomerate with a hand in virtually every viable iteration of mineral extraction.
Financially, all three of these companies have struggled in the face of growing secular headwinds in their main industry. With a 2012 loss of about $3 billion in revenues of $51 billion, Rio is clearly the worst-off of the bunch however Xstrata’s financial situation is not exactly rosy. It earned about $1.2 billion on $31 billion in revenues for a profit margin of less than 4 percent. Meanwhile, Glencore International PLC, St. Helier (OTCMKTS:GLCNF)’s $3.1 billion in after-tax earnings equated to a profit margin of less than 1.5 percent. With respective negative cash flows of $5.5 billion and $6.5 billion, both XSTRATA PLC ADR (OTCMKTS:XSRAY) and Rio are bleeding cash as well. Rio Tinto plc (NYSE:RIO) has an operating margin of 22% but is hurting on the financing side. Rio is down 17% in the last 52 weeks.