LONDON/MELBOURNE, April 30 (Reuters) – Former Xstrata boss “Big Mick” Davis wants to build another mining giant, partly driven by what several sources say is a keen sense of rivalry with Glencore’s Ivan Glasenberg, but it won’t be easy even for someone with his proven track record.
Davis has been involved in some of global mining’s biggest and most formative deals, including the creation of BHP Billiton and its smaller rival Xstrata. He expanded Xstrata over a decade from a $500 million company to a $46 billion one taken over by Glencore, which was already its largest shareholder, last year.
Now he has set up a fund, X2 Resources, which is looking to buy up mines again and is reportedly targeting some of the very assets he traded more than a decade ago.
Unlike then, when miners rode a boom powered by double-digit growth in China, coal prices now languish near four-and-a-half-year lows and the outlook for coal demand growth is uncertain.
Yet armed with $3.75 billion and rising, and planning to raise three times as much in debt, Davis was reported this week to be lining up a bid for BHP’s thermal coal assets, along with aluminium, manganese and nickel assets that BHP wants to jettison.
The PR company representing X2 Resources declined to comment on the newspaper report or on other details and opinions contained in this article.
Davis knows the shunned assets better than any other potential bidder, as most of them went into Australian miner BHP when it merged with Billiton in 2001, a deal he helped to engineer as finance director of the London-listed mining firm.
“With coal he is totally within his comfort zone,” said Investec analyst Hunter Hillcoat.
“If he was to acquire coal assets at this point he’d be doing what he’s got a history of doing: buying assets at the bottom of the cycle and therefore benefiting extremely when the cycle turns … It’s a classic Mick Davis tactic.”
It is a tactic that some people with close knowledge of the business believe can work, despite the challenges.
“I think he’s got very good chances of success. He has done it once and wants to do it again,” said a London-based investment banker who has worked on various deals with Xstrata.
Others are not so sure, citing slowing growth in China and its likely impact on commodity prices.
“I question whether the same value creation is possible this time around,” said a second investment banker involved in mining.
“You can create value, but whether you can create value that PE (private equity) investors would expect, I think that is an open question. I am not swayed by the magic dust being sprinkled on this at the moment. I am a bit of a cynic.”
Private equity firms would expect an annual rate of return at least in the high teens but generally much higher, while mining companies have lower returns, the second banker said.
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