Davis feels the mining deals heat

MORE than a year after he launched his private fund, former Xstrata boss Mick Davis is coming under pressure to build a new mining empire with the $6-billion (about R72-billion) in capital he has raised.

The renowned deal maker set up X2 Resources 18 months ago after Glencore’s $46-billion takeover of Xstrata, when he was passed over for the top job in favour of his Glencore counterpart, Ivan Glasenberg.

Davis has since approached most large mining companies looking to buy a variety of assets, banking and industry sources said, but nobody has agreed to sell, given a feeling that prices are rock bottom and may turn up again before long.

“Mick’s team has been looking at so many assets closely,” said a source close to Davis. “But nobody wanted to sell to them. Vale didn’t want to sell, Rio didn’t want to sell. BHP didn’t want to sell.”

With his portfolio still empty, some insiders expressed concern that investor patience with Davis may run thin.

A banking source said: “Not all those investors are stuck on mining. So they say, ‘If we can’t spend on this, we’ll go buy a bank or a supermarket.’ I think Mick is feeling the pressure to do something, but the sector is as cheap as it gets.”

The PR company representing X2 declined to comment and did not make Davis available for comment.

Davis has gathered $5.6-billion backing from investors — including private equity group TPG Capital, commodities trader Noble Group and sovereign wealth and pension funds — who have been drawn by his reputation.

The former Eskom, Gencor and Billiton executive began building his empire in 2002, when Xstrata listed, and acquired a collection of coal assets from giant commodity trader Glencore.

The cash flow from those mines then financed a series of mostly successful deals that over a decade transformed Xstrata from a $500-million minnow into a $50-billion FTSE 100 company, until it was taken over by Glencore, one of its largest shareholders.

Davis set up X2 with the clear intent to repeat Xstrata’s success — but motivated also, the sources said, by some antagonism towards Glasenberg, who was a student at the University of the Witwatersrand when Davis was an accountancy lecturer there.

“Mick will want to prove that he can buy assets cheap and turn them around,” said another banking source, who has dealt with Davis over the years. “You get these jobs at the top because you’re a street fighter.” That said, receiving expressions of interest from a turnaround king has only encouraged some asset owners to hang on to them.

BHP Billiton, the world’s largest mining company, decided, for example, to spin off its unloved assets into a separate firm, South32, whose shares would be distributed to BHP investors.

“You don’t want to look like an idiot in hindsight,” a third banker said. “BHP said to themselves, ‘ We think we’re in a trough, but we can’t be sure. We’ve a pretty good idea what these assets are worth but we can’t be wrong if we demerge.’ ”

Davis has not been put off by BHP Billiton’s action, however, and is still looking at South32, as well as some of Anglo American’s base metals and energy assets, say the sources.

The latter deal may be more likely: hit harder than its rivals by the latest downturn in metals prices, Anglo American wants to raise money through divestments to defend its credit rating and hit profitability targets set by boss Mark Cutifani.

South32, with a book value of about $12-billion, could be too costly for X2 once debt and a premium are included: investors estimate X2 could gear up to $10-$15-billion. —