Glencore to buy back mine from Xstrata

By Garry White Published: 5:45AM GMT 05 March 2010

Prodeco spark cave - Glencore to buy behind cave from Xstrata

Glencore had to surprise Xstrata either it would squeeze the cave prior to the choice on it lapsed at 6pm yesterday. After a climb in item valuations, the cave is right away worth some-more than the cost of the option.

Glencore owns roughly 35pc of the Swiss-based mining group, but did not have the money to experience in the miner"s cash-call last year. A argumentative deal, of that the choice was a part, was struck so Glencore could say the interest in Xstrata.

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Xstrata, headed by arch senior manager Mick Davis, was the primary London-listed miner to have known a deeply ignored rights issue to seaside up the change piece in Jan 2009 after commodity prices plunged in the last entertain of 2008. Glencore did not put any money in to the fundraising. Instead, Xstrata paid for the Columbian thermal spark cave from Glencore for $2bn, that was the worth of Glencore"s guilt in the rights issue, that was ignored 66pc. A call choice was required since the dual companies unsuccessful to reach a full agreement on an suitable cost for Prodeco.

Should Glencore, as expected, take up the repurchase option, it will compensate Xstrata $2.25bn and the net change of any money invested by Xstrata and any enlarge accrued but not distributed. Analysts hold this could move the remuneration to $2.5bn.

The understanding was argumentative when it was primary announced, with Citigroup describing it as Xstrata "borrowing a spark asset".

After an alleviation in item values over the last year, Michael Shillaker, an researcher at Credit Suisse, has distributed that the choice is right away "in the money" by about $700m, so it doubtful that it will not be exercised. "We hold a repurchase is mostly approaching by the marketplace thus do not design a clever disastrous greeting if the choice is exercised," Mr Shillaker said.

However, questions per liquidity at Glencore still sojourn - and a little researcher hold that a squeeze could lead to a downgrading of Glencore"s debt.

How the argumentative understanding came aboutQ Why does Xstrata own the mine?

A Glencore, that owns 34.5pc of Xstrata, was incompetent to lift the supports to take piece in the company"s rights issue last year. An item barter was concluded so the Swiss merchant could say the stake.

Q Why was there a call option?

A The dual companies could not determine on a satisfactory cost for Prodeco, as item values plunged at the begin of the recession.

Q Will Xstrata have a profit?

A Yes. The worth of the primary understanding was $2bn and Xstrata will get behind $2.25bn and any investments and profit. It is approaching to embrace $2.5bn. However, this is believed to be next the stream marketplace worth of the mine.

Q What will Xstrata do with the $2.5bn?

A The supports will be used in Xstrata"s $19bn, three-year investment programme. It plans to enlarge spark and copper prolongation by 50pc and stand in the outlay of nickel.

Q How will the marketplace react?

A Most analysts hold a sale is labelled in and there will be no vital share cost moves.