Xstrata PLC

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Xstrata PLC

Bahnhofstrasse 2, Postfach 102
Zug CH-6301
Telephone: +41 41 726 60 70
Fax: +41 41 726 60 89

4th Floor, Panton House, 25 Haymarket
United Kingdom
Telephone: +44 20 7968 2800
Fax: +44 20 7968 2810
Web site: http://www.xstrata.com

Public Company
Incorporated: 1926 as Suedelektra Holding AG; 1999 as Xstrata
Employees: 17,062
Sales: $6.09 billion (2004)
Stock Exchanges: London Zurich
Ticker Symbol: XTA
NAIC: 212234 Copper Ore and Nickel Ore Mining;
212111 Bituminous Coal and Lignite Surface Mining;
212112 Bituminous Coal Underground Mining;
212291 Uranium-Radium-Vanadium Ore Mining;
212299 Other Metal Ore Mining; 331511 Iron
Foundries; 331522 Nonferrous (Except Aluminum) Die-Castings

Xstrata PLC has risen rapidly in the early 2000s to become one of the world's major mining groups. The company is active in commodity mining markets: coal; copper; zinc; and alloys. Xstrata is the world's leading producer of export thermal coal, with mines in South Africa and in New South Wales and Queensland in Australia, and is also a major producer of coking coal from its site in Queensland. The company owns or has interests in more than 30 coal mines, and produces more than 70 million tons per year, more than two-thirds of which are in Australia. Some 90 percent of the group's coal production is destined for the export market. Coal represents approximately 35 percent of the group's total revenues, which topped $6 billion in 2004. Xstrata's Copper production takes place in mines in Queensland, Australia, and in Argentina and Peru, including the group's 50 percent share of Argentina's Alumbrera open-pit gold and copper mine. Copper accounts for nearly half of the group's revenues. Zinc (including lead) production is based on the former Asturiana de Zinc, acquired in 2001, with zinc and lead smelters in Spain, Germany, Australia, and the United Kingdom. Xstrata's Alloys division is the world's largest producer of ferroalloys, including chrome and vanadium, with operations centered on South Africa and Australia. Xstrata's transformation into a major mining firm was achieved through an ambitious acquisition program costing more than $3 billion. This process has been led by former Billiton executive, and one of the architects of the BHP Billiton merger, Mick Davis. Xstrata continues to seek large-scale acquisitions into the mid-2000s. Its takeover bid for Australia's WMC Resources in 2005 failed, however. Xstrata is listed on the London Stock Exchange but is headquartered in Zug, Switzerland.

Financial Investments in the 1920s

Xstrata originated as a financial investment vehicle founded in 1926 as Suedra Holding AG in Zug, Switzerland. Suedelektra's founders included a number of privately owned banks, as well as a group of industrialists. The company's initial targets were the newly developing South American energy and infrastructure markets. Among the group's earliest investments were stakes in Lima Light & Power in Peru, and Argentina's Empresas Electricas de Bahia Blanca and Americana de Luz y Traccion.

The Depression era, however, quickly wiped out much of Suedelektra's investments, and the company lay relatively dormant until the end of World War II. Activity at Suedelektra picked up again following the war, and the company developed a strong assets portfolio throughout the Latin American region. Political upheavals in the region during the 1960s and 1970s once again dragged down the value of the group's investments; by the end of the 1970s, many of Suedelektra's assets had been nationalized. Although the company was to receive compensation for part of its holdings in the late 1980s, Suedelektra abandoned its active infrastructure investments, converting to the less volatile securities market. Suedelektra also had gone public, with a listing on the Zurich Stock Exchange. By the end of the 1980s, however, a majority of Suedelektra's stock was held by the Union Bank of Switzerland.

In 1990, Union Bank decided to sell its majority stake to the Swiss trading group Glencore International. Formed in 1974, Glencore had risen to become a major, diversified corporation, with a particular interest in the trading of natural resources as well as a number of industrial holdings. Glencore achieved a degree of notoriety, however, after its founder, Marc Rich, was accused of racketeering by the United States. (Rich later received a controversial pardon from personal friend and departing President Bill Clinton.)

Under Glencore, Suedelektra embarked on its second life. Nonetheless, the company clung to its roots as a venture capitalist, now with a focus more directed at the natural resources market. In 1991, Suedelektra entered the oil and gas industry with the purchase of a stake in Argentina's newly privatized Santa Cruz 1 oil fields. By 1992, however, Suedelektra had acquired control of Santa Cruz, marking the company's transition from venture capitalist to an investment group with direct control of its holdings.

Second Life in the 1990s

Suedelektra's interests became increasingly industrial. In 1994, for example, the company acquired Chromecorp Holdings, a major ferrochrome producer based in South Africa. In that year, as well, the company acquired Chile's Forestal del Sur, a producer of wood chips for the paper industry. In 1995, the company turned to Australia, entering the coal industry with the purchase of a 70 percent stake in Abelshore Limited. That purchase boosted Suedelektra's revenues by more than one-third. Fueling the group's expansion was the successful listing of Chromecorp on the Johannesburg Stock Exchange that year.

Yet Suedelektra remained something of an oddity within the overall Glencore group, which by then was more focused on its metals and mining commodities trading activities. Suedelektra's traditional structure, as a hands-off investment vehicle, also appeared out of place in fast-growing Glencore International. In 1996, therefore, Glencore put a new management team in place at Suedelektra, led by Daniel Sauter and Jean-Pierre Conrad. Sauter and Conrad then launched Suedelektra on a corporate makeover, with a focus on the steel metals market.

Suedelektra made its first purchase in that direction, paying $90 million to acquire a 23 percent share of Mount Holly, an aluminum smelter operation based in South Carolina in the United States. In 1997, Suedelektra stepped up its metals business with an entry into the ferrochrome alloys market, acquiring South Africa's Rhoex, a major vanadium producer, for $61 million. By the end of that year, Suedelektra had completed the purchase of a second vanadium producer, Vantech, also in South Africa, paying $82 million.

In order to fuel its transformation, Suedelektra began selling off its now noncore assets in 1997. That effort helped to raise more than $220 million by the beginning of the 2000s, compared with expenditures nearing $700 million since 1992. Part of that spending went toward the purchase of full control of Chromecorp and Rhoex, for $35 million and $14 million, respectively, in 1998. That year saw the group's largest acquisition to date, of South Africa's ferrochrome producer CMI, for $215 million. In 1999, to reflect the change in the nature of its operations, Suedelektra took on the new name of Xstrata AG.

Xstrata's transformation was completed, in large part, by 2001, when the company expanded into the zinc and lead market with the acquisition of Spain's Asturiana de Zinc S.A. The purchase placed Xstrata among the world's leaders in the zinc and lead market, paving the way for Xstrata's developing zinc operations not only in Spain, but in Germany, the United Kingdom, and Australia. The Asturiana acquisition, however, saddled Xstrata with a heavy debt, and the company was forced to consider raising equity to bring down its gearing ratio, which stood at a dangerous 80 percent. In 2001, however, Sauter and Conrad abruptly resigned from the company.

Mining Major for the 2000s

Glencore, which was busy preparing the launch of a new publicly listed company, called Enex, for its own South African and Australian mining interests, went looking for a replacement for Sauter and Conrad. Glencore's choice fell to South African native Mick Davis, who, as finance director with Billiton, had played a pivotal role in orchestrating its massive $40 billion merger with BHP. The merger had created BHP Billiton, the world's second largest mining group, with a listing in London but headquarters in Melbourne. Davis, however, was unwilling to uproot his family to move to Melbourne. As a result, following the merger Davis was offered the somewhat secondary position as development director at the company's London office.

Davis let his discontent be known and was quickly approached by Glencore to become Xstrata's CEO. Davis agreed, a decision that initially raised eyebrows in the mining industry. In Davis's own words, Xstrata was "going nowhere." Yet Davis, who had long played second fiddle in the finance director position, saw an opportunity to take on a leadership role and transform Xstrata into a world player in the mining industry.

That transformation came more quickly than Davis expected. Glencore had reached the final stage of Enex's initial public offering (IPO), and by September 2001 had entered the final days of an international road show in order to drum up interest in the investment community. Yet the terrorist attacks of September 11 pulled the rug out from under the Enex IPO.

Company Perspectives:

We will grow and manage a diversified portfolio of metals and mining businesses with the single aim of delivering industry-leading returns for our shareholders. We can achieve this only through genuine partnerships with employees, customers, shareholders, local communities and other stakeholders, which are based on integrity, co-operation, transparency and mutual value-creation.

The collapse of the Enex offering signaled an opportunity for Davis and Xstrata. At the end of September 2001, Davis approached Glencore with the proposal that Xstrata buy up Glencore's Australian and South African coal interests. The companies reached an agreement by March 2002. As part of the deal, Xstrata relaunched itself as Xstrata PLC, with a highly successful IPO on the London Stock Exchange. Xstrata then paid Glencore more than $2.5 billion for the acquisition of the Enex operations.

Through 2002, Xstrata continued making a series of bolt-on acquisitions, spending some $230 million to buy up additional coal mines in Australia, as well as a new zinc smelter in Nordenham from Metaleurope. In the meantime, Davis continued looking for the next transformational deal.

That deal came in 2003, as the industry cycle bottomed out, leaving Australia's MIM Holdings, the country's largest remaining independent mining group, in financial difficulties. Davis approached MIM with a takeover offer worth $1.7 billion which was considered as too low by many, including MIM's own managing director. Nonetheless, the offer was accepted by a majority of MIM's shareholders and the deal went through.

The addition of MIM's vast mining holdings in Australia, which included coal as well as copper, lead, and zinc, boosted Xstrata into the ranks of world mining leaders, with sales of more than $6 billion by the end of 2004. The timing of the acquisition was considered by some as a "masterstroke"soon after the acquisition, commodities prices began a steady upswing.

Buoyed by the success of the MIM acquisition, Davis began seeking out a new major acquisition. In November 2004, Xstrata launched a bid worth AUD 7.4 billion ($5.8 billion) for Australian mining giant WMC Resources. Yet that offer quickly became a hostile one, and in early 2005 a new suitor for WMC appearedDavis's former employer, BHP Billiton, which topped Xstrata with an offer for more than $8 billion in March 2005.

The WMC deal might have boosted Xstrata into the ranks of global giants such as BHP Billiton and Anglo American. Undaunted, Davis announced his intention to continue to pursue large-scale acquisitions in his effort to transform Xstrata into a global mining major for the 2000s.

Principal Subsidiaries

Abelshore Pty. Limited (Australia); Alloys; Asturiana de Zinc S.A. (Spain); AZSA Holdings Pty. Limited (Australia); Britannia Refined Metals Limited; Char Technology (Pty.) Ltd. (South Africa); Cook Resources Mining Pty. Limited (Australia; 95%); Cumnock Coal Limited (Australia; 84%); Enex Foydell Limited (Australia); Enex Liddell Pty. Limited (Australia); Enex Oakbridge Pty. Limited (Australia); Ernest Henry Mining Pty. Ltd. (Australia); Hunter Valley Coal Corporation Pty. Limited (Australia); Jonsha Pty. Limited (Australia); Maloma Colliery Ltd. (South Africa; 75%); Minera Alumbrera Limited Antigua (50%); Mount Isa Mines Limited (Australia); Oakbridge Pty. Limited (Australia; 78%); Oceanic Coal (Australia) Limited (Australia); Ravensworth Operations Pty. Limited (Australia); Saxonvale Coal Pty. Limited (Australia); Tavistock Collieries (Pty.) Ltd. (South Africa); The Wallerawang Collieries Limited (Australia; 74.1%); Ulan Coal Mines Limited (Australia; 90%); Xstrata (South Africa) (Pty.) Ltd. (South Africa); Xstrata Coal Investments Limited (Australia); Xstrata Coal Marketing AG (Switzerland); Xstrata Coal Pty. Limited (Australia); Xstrata Coal Queensland Pty. Limited (Australia); Xstrata Technology Pty. Ltd. (Australia); Xstrata Windimurra Pty. Ltd. (Australia); Xstrata Zinc GmbH (Germany).

Principal Competitors

Anglo American PLC; BHP Billiton PLC; Societe Nationale Industrielle et Miniere; Samancor Ltd.; Highveld Steel and Vanadium Corporation Limited; Corporacion Nacional Del Cobre De Chile; Gordoy Cia; Umicore; WMC Resources Ltd.; Elkem ASA.

Key Dates:

Suedelektra Holding is founded by a group of Swiss banks and industrialists in order to acquire investments in South American energy and infrastructure industries.
Suedelektra, by now a securities management group, is acquired by Glencore International.
Suedelektra acquires a stake in Santa Cruz oil and gas fields in Argentina.
The company acquires Chromecorp in South Africa and Forestal, a wood chips producer, in Chile.
Abelshore, an Australian coal miner, is acquired.
A new management team shifts strategy to focus on metals, acquiring a stake in Mount Holly in the United States.
The company acquires Rhoex and Vantech in South Africa and begins selling off noncore assets.
The company acquires CMI in South Africa and completes control of Chromecorp and Rhoex.
The company changes its name to Xstrata AG.
Asturiana de Zinc in Spain is acquired.
Mick Davis becomes company CEO and leads the acquisition of Glencore's coal mining interests in Australia and South Africa.
The company acquires MIM Holdings in Australia and its coal and metals mining operations.
The company launches a hostile takeover bid for WMC Resources in Australia.
The company loses its bid for WMC; plans to seek new acquisitions are announced.

Further Reading

Cooper, Mike, "Xstrata Combines Global Copper Businesses," American Metal Market, January 15, 2004, p. 5.

Cope, Nigel, "Mick Davis: Big Hitter Prepares Xstrata for Joining the Market's Elite," Independent, March 11, 2002, p. 15.

"Deep Down Under," Economist, April 12, 2003.

Gooding, Ken, "Xstrata on the Acquisition Trail," Africa News Service, February 12, 2003.

Hall, William, and Matthew Jones, "Mining Group Moves to Scale Up Its Operations," Financial Times, February 22, 2002, p. 30.

Klinger, Peter, "Xstrata on the Acquisition Trail," Times (London), March 12, 2005, p. 63.

Laurance, Ben, "The Mining Boss Who Struck Gold with a Deal That He Mapped Out on a Matchbox," Mail on Sunday, August 17, 2003.

Lynch, Martin, "OneTrick Pony," Australasian Business Intelligence, January 6, 2005.

Wisenthal, Stephen, "Xstrata Goes Universal," Australasian Business Intelligence, March 14, 2005.

"Xstrata (XTA)," Investors Chronicle, November 26, 2004.

M.L. Cohen