By Alex MacDonald
LONDON--Glencore Xstrata PLC (GLEN.LN) has revived talks with
Brazil's Vale SA (VALE) to combine their nickel-mining operations
in Canada's Sudbury basin in an effort to cut costs following a
slump in nickel prices, said a person familiar with the situation
Friday.
"The talks are purely exploratory," said the person, who wished
not to be named. "Let's see what happens," he added. Reuters first
reported the story Friday, citing sources who said that the talks
are at an early stage, and that the companies are considering a
number of options for mining and processing in hopes of
consummating a long-debated Sudbury tie-up.
Depending on the structure of the deal, a tie-up could lead to
substantial savings for both miners, if all or part of their
mining, milling and even smelting operations are brought together,
Reuters said.
In 2006, a proposed merger of Falconbridge and Inco--the
then-players in Sudbury, but later taken over by Xstrata and
Brazil's Vale, respectively--expected annual synergies and cost
savings of about $550 million, the news agency said.
The person familiar with the matter told the Wall Street Journal
that the annual synergies were likely to be fewer, given the drop
in the nickel price. The benchmark London Metal Exchange nickel
price has fallen 18.4% since the beginning of the year to $13,915 a
metric ton.
Vale wasn't immediately available to comment.
Russia-based OAO Norilsk Nickel (GMKN.RS), the world's largest
nickel and palladium producer, said last week that roughly 15% of
global nickel capacity is idle or at a loss and more shutdowns are
likely if the nickel price remains low.
Norilsk said that nickel miners needed about a 20% profit margin
just to sustain their business.
The Sudbury nickel tie-up talks are taking place as Glencore
Xstrata is seeking a buyer for its $5.9 billion Peruvian Las Bambas
copper project. Glencore Xstrata agreed to sell Las Bambas, which
is still being built, in order to secure regulatory approval from
China's Ministry of Commerce for Glencore International PLC's
purchase of Xstrata PLC in May. That deal valued the remaining 66%
of Xstrata shares that Glencore didn't already own at $29.5 billion
and valued all of Xstrata's equity at $44.6 billion.
The eventual buyer of Las Bambas will need to be approved by
China's Ministry of Commerce, and will also have to pay a price
that is higher than the fair value of the project as determined by
two independent investment banks chosen by Glencore and which also
covers all the project costs incurred before the sale.
People familiar with the matter confirmed that two Chinese
groups have been invited to carry out due diligence on the project
and make a second bid for the project. There are also other groups
made up of Western companies in the mix and gold-streaming
companies that are also conducting due diligence on the project, a
person familiar with the matter said.
Gold-streaming companies provide upfront financing for companies
looking for capital and in return, receive a right to purchase a
fixed percentage of the life-of-mine gold produced, at a fixed
price.
The person familiar with the matter confirmed that MMG Ltd.
(1208.HK), a unit of Chinese state-owned metal trader China
Minmetals Corp., has teamed up with a unit of China's Citic Group
Corp., while Chinalco Mining Corp., the copper unit of Aluminum
Corp. of China Ltd. (2600.HK), has partnered with Chinese base
metals producer Jinchuan Group International Resources Co. Ltd.
(2362.HK), to make separate bids for Las Bambas. Both MMG and
Chinalco are majority shareholders in their respective consortia.
Chinalco is already present in Peru with the Toromocho mine.
Glencore Xstrata said last month that it hopes to sign a sales
agreement on Las Bambas by the end of the year with a view to
closing the deal by 2015.
--Francesca Freeman in London contributed to this story.
Write to Alex MacDonald at alex.macdonald@wsj.com
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