CANADIAN MINING PERSPECTIVES: Vale, Xstrata in merger talks

Brazilian mining giant VALE (formerly Companhia Vale do Rio Doce) has confirmed that it is "in discussions" with Sw...
Brazilian mining giant VALE (formerly Companhia Vale do Rio Doce) has confirmed that it is "in discussions" with Swiss miner XSTRATA to put together a merger deal worth as much as $90 billion (all amounts are in US dollars).

The merger of these two companies would create a global colossus. Nickel, copper, precious metals, iron ore, coal, aluminum - everything from alloys to zinc - they produce it all, and usually by the millions of tonnes.

The high price of metals is boosting the bottom lines of both companies. Vale had gross revenues of $20.4 billion and a net income of $6.5 billion in 2006. Xstrata had gross revenue of $17.6 billion and a net profit of $2.4 billion. Vale had assets of $130.5 billion, and Xstrata reported $27.2 billion. The combined companies would have a market capitalization of $150 billion.

If Vale and Xstrata can engineer a merger, the best idea to come out of it would be the rationalization of operations in the Sudbury Basin. For over 100 years nickel production has been dominated by rivals Falconbridge (now Xstrata Nickel) and Inco (now known as Vale Inco). When Inco and Falconbridge proposed a merger in 2006, they claimed that there were half a billion dollars to be saved each year through better management of their combined resources in northern Ontario. Those savings from joint operation are still available though optimization of the processing facilities, maximizing mine production, administrative savings and other improvements.

Neither the Vale-Xstrata nor a BHP-Rio Tinto merger deal is a sure thing, especially in these days of bear markets. Or perhaps shareholders will see the offers as the only way to get value out of their investments.

Remember that the proposed takeover of RIO TINTO by BHP BILLITON is still on the table. BHP Billiton has put $99 billion on the table. Mention ANGLO AMERICAN, and you have the world's top five integrated mining and metals companies.

I'm hanging on tightly as the merger-go-round spins faster than ever.


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