What Was the Holdup?
It is no secret that the rapidly growing Chinese economy requires immense supplies of copper to maintain its expansion. As one of the world’s largest producers and distributors of copper, Glencore International PLC, St. Helier (OTCMKTS:GLCNF) is a crucial arbiter of these supplies. According to those familiar with the negotiations, Chinese antitrust regulators were unwilling to give their blessing to the deal in light of Glencore’s $5.2 billion investment in a major Peruvian copper project. Since Glencore and Xstrata both operate major projects within the PRC’s borders, the two companies would have been unable to combine without its government’s approval.
It has been reported that Glencore and XSTRATA PLC ADR (OTCMKTS:XSRAY) collectively account for up to 14 percent of China’s copper imports. In turn, Glencore’s Peruvian Las Bambas mine supplies a significant portion of this amount. Since the combined company would control this mine, regulators believed that it would enjoy an unacceptable amount of pricing power in the space.
Problem Solved
Fortunately, Glencore had long been prepared to sell off the Las Bambas mine in exchange for regulatory approval. Under the terms of the tentative agreement that it reached with the Chinese authorities, Glencore will have until August of 2014 to finalize the sale of the mine. In the event that it cannot find a willing buyer, the combined company will have to sell 100% of the mine’s production to competitors that also do business in China.
Moreover, Glencore has also agreed to guarantee “adequate” supplies of copper, lead and zinc to Chinese buyers for at least the next eight years. Although this part of the deal was not anticipated, it does not seem to saddle Glencore with an undue burden. According to recent reports, the acquisition should be finalized in early May.
It should also be noted that Glencore will ease the financial burden of the Xstrata acquisition by refinancing more than $13 billion in outstanding loans. This could provide investors who worry about the company’s debt load with assurances that Glencore is taking its obligations seriously.
Possible Plays
The synergies that this deal offers should be obvious to market-watchers who have some familiarity with the mining space. Although the forced sale of the Las Bambas mine is less than ideal for Glencore, the combined company will survive the hit.
Of course, the global commodities market has been increasingly soft as of late. Investors who believe that this will continue should be wary of investing in a company with such exposure to suddenly volatile commodities like copper and gold. Then again, Glencore seems to be in a stronger position than some of its peers. If it can absorb XSTRATA PLC ADR (OTCMKTS:XSRAY)’s debt load and cash flow woes, it may find itself in a solid position. In this case, a long position in the combined company may be the best way to play this deal.
The article What Happens Now After Chinese Approvals? originally appeared on Fool.com.
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