Xstrata, Glencore Under Pressure to Amend Deal - WSJ.com

#Xstrata PLC and #Glencore International PLC are under intense pressure to amend their proposed merger as people close to the matter said it is becoming increasingly clear shareholders will block the landmark deal on its current terms.

Xstrata, Glencore Scramble to Save Deal

By DANA CIMILLUCA And JOHN W. MILLER

Updated June 27, 2012, 5:32 a.m. ET

Global commodities giants Xstrata PLC and Glencore International PLC are under intense pressure to amend their proposed merger as people close to the matter said it is becoming increasingly clear shareholders will block the landmark deal on its current terms.

The deal, creating a company with a market value of some $60 billion, has been touted as a potential reshaping of the global mining industry. But it is running into a buzz saw of opposition on two fronts: price and executive compensation.

Reuters

The headquarters of Swiss commodities trader Glencore's in Baar, near Zurich.

At issue is both the proposed price Glencore would pay—2.8 of its shares for each Xstrata share—and a £173 million ($270 million) retention package for senior Xstrata officials. Many investors have cried foul over the package at a time when opposition to lavish executive pay is running high in the U.K.
Xstrata has proposed to Glencore new terms for the retention package, according to a person familiar with the matter, in a move that could put the focus on investor demands for Glencore to improve the share ratio.
Xstrata shareholders are scheduled to vote on the deal July 12. In order for it to go forward, they must approve both the share ratio and the retention package in separate votes.
Based on feedback shareholders have provided in recent meetings, it is likely that if both aren't revised, the merger will get blocked, according to two people familiar with the matter.

Representatives of the two companies are working to amend the deal and are aiming for an agreement on new terms in the next few days, though it isn't clear they will be able to reach one. If they aren't able to hammer out new terms, the merger, which would create the world's fourth-largest mining company, is in danger of collapsing.
Adding to the urgency, Qatar Holding, which had been thought to favor the merger on its current terms, said in a statement late Tuesday that it believes a share ratio of 3.25 would be more appropriate. Qatar recently built a 10% stake in Xstrata and is the Anglo-Swiss miner's largest shareholder aside from Glencore, which already owns a 34% stake.
It is unclear whether U.K.-listed Glencore and Chief Executive Ivan Glasenberg will bend on the share ratio, given that he has said in the past that more-generous terms threaten to make the deal uneconomical for the commodities-trading firm.
Xstrata investors' concerns, which had been festering since the deal was announced in February, have been building since the company last month sent its shareholders a 144-page document detailing the retention payments.
Under the plan, Xstrata CEO Mick Davis would receive $14.9 million a year through 2015, for a total of $44.7 million. The retention payments carry no obligation to meet performance targets. Xstrata has said the payments are necessary to keep top managers at the firm, but the people said Tuesday that a performance element would likely need to be added to win shareholder approval. Indeed, one of the people said late Tuesday that Xstrata has proposed to Glencore that the payments be made in stock instead of cash and that for the senior executives they include a performance condition tied to cost savings.
The retention package must be approved by a simple majority of Xstrata's non-Glencore investors, while the overall deal has a 75% approval threshold of non-Glencore investors. That means that if just a third of Xstrata shares are voted against the retention package—or less depending on turnout—it would be defeated.
The bar for rejection on the overall deal vote is even lower, at approximately 16%.
On Tuesday, Glencore shares fell 1.8% £3.03 in London trading; Xstrata fell 1.1% to £7.86 in London.
Write to Dana Cimilluca at dana.cimilluca@wsj.com and John W. Miller at john.miller@wsj.com
Corrections & Amplifications
Qatar is Xstrata's largest shareholder aside from Glencore. An earlier version of this article incorrectly said Qatar was Xstrata's largest shareholder.

A version of this article appeared June 27, 2012, on page B1 in the U.S. edition of The Wall Street Journal, with the headline: Xstrata, Glencore Scramble To Save Deal.

Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved

 See the article online here: Xstrata, Glencore Under Pressure to Amend Deal - WSJ.com

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Base #Metals Market: Nickel, Lead, Zinc All in Surplus – When Will Markets Balance Out?

From MetalMiner:

All the other base metals were in surplus during the first quarter — Lead, for example, to the tune of 10,900 tons, building on a surplus of just 3,600 tons for the whole of 2011. Underlining the state of the market, global stocks rose with LME inventory some 25,500 tons higher at the end of March 2012, compared to end of December 2011, in spite of global refined metal production falling by 155,000 tons January-to-March 2012 from the same period last year.

Consumption dropped even more, down 166,000 tons according to the WBMS, and this time China also played a part with consumption, down 16 percent from last year reflecting weaker automotive and e-bike sales.

The 161,000-ton surplus in the Zinc market between January and March this year shows an increase even on last year’s surplus of 540,000 tons for the whole of 2011. The LME now holds some 74 percent of global inventory, showing it is truly the market of last resort for producers of a metal in surplus. China consumes some 44 percent of global production, but much of its imports, which have fallen only marginally this year, come from other Southeast Asian markets. The WBMS cross-references export data from Japan, South Korea, Taiwan, etc. to correlate the Chinese import figures, supporting the picture of Chinese imports remaining at historically high levels.

Reports of slowing stainless production both in Europe and Asia are supported by WBMS reports of rising surplus’ in the Nickel market. Jan to March production exceeded apparent demand by 6,200 tons compared to a surplus of 8,600 tons for the whole of 2011. Mine production during Jan to March was up 98,200 tons above the same period in 2011 but so too was consumption up with apparent demand increasing by 46,700 tons, some of the surplus finding it’s way into increasing LME stocks up 8,300 tons over the level at the end of 2011.

See the whole article online here:  Nickel, Lead, Zinc All in Surplus – When Will Markets Balance Out?

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Mid-tier producers grapple with #Peru's growing pains | The Northern Miner #Mining

Mid-tier producers grapple with Peru's growing pains

By: Ian Bickis

VANCOUVER 2012-06-25

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Peru is experiencing a mining boom of global proportions thanks to years of heavy investment and increasing production.

The country is the world’s number-two copper producer, number-two silver producer, number-six gold producer, number-two zinc producer and number-four lead producer, and it ranks high in other commodities, too. Exports, of which mining accounts for about 60%, have grown from $6 billion in the late 1990s to $46 billion in 2011.

That growth shows little sign of letting up, with $50 billion in investments lined up for mining projects, and much of the country remaining under-explored.

But the rapid growth is creating new challenges for companies large and small trying to open and operate mines in the country. On a social level there is growing discontent as to how the benefits of mining have been distributed, while on the operational side, the mining boom has brought with it the same kinds of labour shortages seen elsewhere in the mining world.

Rio Alto Mining (RIO-T) and Fortuna Silver Mines (FVI-T, FSM-N) are two of the few Canadian-listed companies that have transited from developer to producer in the country. Both have faced these issues, and through a variety of approaches have succeeded despite them, continuing to ramp up production and for the most part increase earnings.

Since restructuring in 2009 and listing on the Lima Stock Exchange, Rio Alto has commissioned its first gold mine, La Arena, in Peru’s northwest district of La Libertad. The company started pre-production at the oxide mine in May 2011, produced 56,000 oz. gold in the first quarter of 2012 and expects to produce around 155,000 oz. gold for the year. Meanwhile, the company’s stock price has gone from 7¢ in late 2008 to a recent 52-week high of $4.76, at a time most mining stocks have declined.

In the past six years Fortuna has gone from being a company with five employees to a mid-tier producer with two mines in operation and some 1,500 employees, including contractors. In the first quarter of 2012 the company produced 953,000 oz. silver, 5,100 oz. gold, 4.4 million lb. lead and 5.3 million lb. zinc from its Caylloma polymetallic mine in Peru’s southern region of Arequipa and its San Jose mine in Mexico. Since late 2008 the company’s stock price has gone from 38¢ to a high of $7.58 in late February.

But Fortuna’s stock price was hit hard at the end of March, dropping well below $4 for a stretch, after several issues came to light in its quarterly results. The news that most affected the company’s stock price were the higher costs it encountered in the quarter and its projections of 20% in cost inflation for 2012. According to Fortuna’s investor relations manager Carlos Baca, that cost increase can be blamed mostly on rising labour costs.

Peru, which had been isolated from the global labour crunch for some time thanks to its established talent pool, is now facing the same shortages as the rest of the industry.

Jorge Ganoza, president and CEO of Fortuna, said in a phone interview from Lima that he remembers hearing about skilled-worker shortages in Australia and South Africa a few years ago, but that it wasn’t affecting Fortuna’s operations.

“We were in Peru and Mexico at the time and we didn’t know what they were talking about. There were no shortages here. And then the shortages moved to North America — to the U.S. and Canada — and we were still immune to that. But now it’s ­happening to us,” Ganoza says.

Ganoza spots big career ads in the Lima newspapers from BHP, Rio Tinto and the other big multinationals hunting for skilled labour, often looking for workers for their operations abroad in ­Australia or Africa.

“Peru has become a pool for talent, and that of course is putting pressure on us here as well,” Ganoza says.

In response, Fortuna has implemented new compensation packages, but also moved to do things Ganoza has not seen in the past, like mapping talent in the company, determining key positions and issuing retention packages for key personnel. Without the vast resources of the majors, it can be harder to manage human resources, but Ganoza says that for the size of the company, Fortuna has been innovative in its efforts.

At Rio Alto, company president and CEO Alex Black said in a phone interview from Lima that the company has also seen labour costs increase, despite the country’s talent pool.

“We’re lucky because Peru is a mining country, so there is a lot of talent in-country. Having said that, we are seeing wage inflation in the mining sector because the country is growing and the mining sector is very lucrative.”

But Black says that Rio Alto is well placed to attract workers because Peru has an 8% profit sharing regime, and Rio Alto expects to be profitable in the coming years as it ramps up production.

“Workers will gain considerably from a successful operation,” Black notes. He also added that with Rio Alto’s La Arena mine sitting at a relatively manageable 3,500 metres, and within about 100 km of the coast and the city of Trujillo, it is more accessible and easier to attract workers than some of Peru’s more remote or high-latitude mines. And the company’s stock performance, helped by a stable Peruvian shareholder component, has given the company a higher profile that has also made attracting talent easier.

“It adds to our visibility and credibility. We’re not some junior company that just appeared. So that helps us attract people as well,” Black says.

But while the labour shortage creeps up in the background, social unrest is the glaring challenge to operating in Peru. The high-profile conflict surrounding Newmont Mining’s (NMC-T, NEM-N) $4.8-billion Conga copper-gold project is only the most visible of many simmering social conflicts affecting projects large and small across the country.

Both Rio Alto and Fortuna have experienced social unrest in the past year, though both incidents were fairly isolated. Rio Alto had around 30 locals blockade a road to its mine last September, and at the end of May the road to Fortuna’s Caylloma mine was blocked by a few hundred people in a 48-hour strike.

In Rio’s case, Black says the locals did not have particular demands and mostly sought clarification of agreements already made. The illegal blockade prevented 700 people from getting to work and disrupted operations at the mine, but the company took a patient approach.

“Instead of letting nature take its course and allowing the police to come in, we instigated dialogue to let them voice their objections to get the blockade over and done with,” Black says. It took a few days, but after the company agreed to form joint committees to monitor previous agreements, the blockade was lifted, while the community members agreed to start with dialogue before trying any blockades in the future.

Black also says that being near Barrick Gold’s (ABX-T, ABX-N) Lagunas Norte mine has made things easier for the company, since Barrick started off on the right foot when it arrived. He contrasted that with Newmont’s problems, which stem in part from having a poor operational record in the past.

“Here in Peru, if you make mistakes, especially on the social side, those mistakes stick with you for a long time,” Black says.

As to the Callyoma protest, Ganoza says locals blocked a main road intersection in a show of force that affected several mines in the area, while local media reported they were demanding more local infrastructure projects. The roads reopened within 48 hours, but the lack of infrastructure spending in the countryside makes such protests likely to happen again.

A recent Reuters investigation showed that Peru’s provincial governments are sitting on $3.5 billion in mining revenue gathered over the past decade, but lack the capacity to spend it.

Ganoza has seen this problem first-hand. He’s witnessed the country’s rapid growth in the past decade that has halved the poverty rate to 28%, but left many people not benefitting from the growth.

“We went from having a government without financial resources, to local governments having a large amount of financial resources available. So we need to catch up and learn to spend that money,” Ganoza says.

The problem, Ganoza says, is not the mining companies, mining legislation or system, but the need for better implementation of what’s already established.

“In Peru we have an excellent mining code that I think should be an example to many countries. It’s just the ability of the government to execute on existing laws . . . we just need the government to be more effective in its use and distribution of state resources,” Ganoza says.

Despite the challenges, both ­Black and Ganoza consider Peru one of the world’s top mining ­jurisdictions.

Ganoza says that Peru has not gotten any easier, but that it stands out as one of the best countries in Latin America.

“Where else are you going to go? In Chile, there is a shortage of power and water. Argentina today has become off limits for the industry basically, with all this nationalism. Brazil has always been challenging and it’s not getting any easier. Ecuador — well, we know all about Ecuador. There is a lot of excitement about Colombia but nothing has been permitted in Colombia yet. So it’s a paradise to go and explore, but how about turning those discoveries into mines?”

With their current projects up and running, Rio Alto and Fortuna  are on the hunt for their next mine. With both companies based in Peru, it is a natural starting point, but Black and Ganoza mention they are looking quite a bit at North America for their next asset as well.
We’ll see if either company decides to leap into another Peruvian challenge, or try its luck elsewhere.

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