Desperately seeking an empire
LONDON • More than a year after he launched his private fund, former Xstrata PLC boss Mick Davis is coming under pressure to build a new mining empire with the US$6 billion in capital he has raised.
The renowned dealmaker set up X2 Resources 18 months ago after Glencore Plc’s US$46 billion takeover of Xstrata, when he was passed over for the top job in favour of his Glencore counterpart, Ivan Glasenberg.
Mr. 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 current prices are at rock bottom and may turn up again before long.
“Mick’s team has been looking at so many assets closely. 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,” said an industry source close to Mr. Davis.
With his portfolio still empty, some sources expressed concern that some investors’ patience with Mr. 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 Mr. Davis available for comment.
Mr. Davis has gathered US$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.
Mr. Davis first set about building his own empire in 2002, when Xstrata listed and then acquired a collection of coal assets from giant commodity trader Glencore.
The cash flow from those mines then financed a seri es of mostly successful deals that over a decade transformed Xstrata from a US$500-million minnow into a US$50-billion FTSE-100 company until it was taken over by Glencore, one of its largest shareholders.
Mr. Davis set up X2 with the clear intent to repeat Xstrata’s success — motivated also, the sources said, by some antagonism to Mr. Glasenberg, who was a student at the South African University of the Witwatersrand when Mr. 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 Mr. 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 Ltd., 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.”
Mr. Davis has not been put off by BHP Billiton’s action, however, but is still looking at South32, as well as some of Anglo American PLC’s base metals and energy assets, according to the sources.
The latter deal may be more likely: harder-hit than its rivals by the latest downturn in metals prices, Anglo American wants to raise money through divestments in order to defend its credit rating and hit profitability targets set by its boss, Mark Cutifani.
South32, with a book value of about US$12 billion, could be too expensive for X2, once debt and a premium are included: investors estimate X2 could gear up to about US$1015 billion.
“Maybe it’s a bit of a stretch but that could still work. Mick is quite clever is terms of structuring innovative deals,” said Investec fund manager and former Xstrata executive Hanré Rossouw, a shareholder in BHP Billiton.
While some think Mr. Davis’ long wait will lead to him striking a deal at the best time to benefit from a turnaround in the market, others argue he may struggle to repeat his success in such a different environment.
“He was lucky last time around, he did a lot of deals when prices were on the way up and China came out of nowhere hungry for metals. The trouble is, this time he has to pick the bottom of the market. But where is it?” said a fourth banking source who has dealt with Mr. Davis during his time at Xstrata.
Mick will want to prove that he can buy assets cheap