PROPOSED ACQUISITION OF PRODECO COAL OPERATIONS
Highlights
· 2 for 1 fully underwritten Rights Issue of approximately 1.96 billion New Shares at £2.10 per share to raise approximately £4.1 billion (approximately $5.9 billion) (before costs), to repay debt
· One of a series of pro-active measures in response to challenging operating conditions and uncertain near-term outlook to strengthen Xstrata’s financial position
· Post Rights Issue net debt to reduce to approximately $12.6 billion, with gearing of less than 30%, at the lower end of the target range
· Proposed Acquisition of the world-class Prodeco thermal coal assets from Glencore, for a cash consideration of $2 billion
Commenting, Mick Davis, Xstrata Chief Executive said:
“The significant and extensive range of actions being taken across Xstrata to optimise cash, together with our actions in May and October to refinance short-term debt, have provided the Group with significant headroom, comfortable interest cover and no significant debt refinancing requirements until 2011.
“Nonetheless, it is clear that, while appropriate for market conditions experienced in the first three quarters of 2008 and indeed in the past few years, in the aftermath of an unprecedented financial crisis, Xstrata’s absolute level of debt is now perceived as a potential constraint on the Group, given the uncertainty that exists over the near-term outlook for commodities.
“Our announcement today of a proposed 2 for 1 Rights Issue to raise approximately £4.1 billion (approximately $5.9 billion) excluding costs, will provide a significant injection of capital, mitigate the risks presented by the current uncertainty and remove this potential constraint.
“In addition, the planned Rights Issue, together with Glencore’s ongoing support for Xstrata, have provided Xstrata with an opportunity to acquire Glencore’s world-class, cash generative Prodeco coal operations in Colombia for a consideration of $2 billion. These low-cost, premier quality operations benefit from significant growth potential and will consolidate Xstrata Coal’s global leadership in thermal coal and strengthen our strategic position in Colombia, to supply both the European and US markets.
“However, Xstrata and Glencore failed to reach full agreement on an appropriate valuation of the Prodeco assets and as a result the transaction includes a Call Option, under which Glencore may buy back the Prodeco assets from Xstrata at any point up to the first anniversary of the closing date, for a total cash consideration of $2.25 billion, plus the net balance of any cash invested by Xstrata and any profits accrued but not distributed to Xstrata. The Call Option Agreement ensures that, should the option be exercised, Glencore will pay a repurchase price that adequately compensates Xstrata’s Shareholders for the option granted. In my view, these arrangements are fair to both parties and at the same time facilitate an orderly Rights Issue process, which is to the benefit of all of Xstrata’s Shareholders.
“The primary objective of the Rights Issue we have announced today is to ensure that Xstrata remains financially robust during current challenging market conditions and going forward, given the lack of visibility into near-term economic conditions. Looking through the prevailing period of uncertainty to the return of a more benign environment, the proposed capital raising also provides the Group with an enhanced platform from which, at the appropriate time, to initiate the next stage of Xstrata’s growth.
“Xstrata continues to operate a suite of cash generative operations across a broad range of geographies, with excellent growth potential and a strong competitive position in each of its key commodity markets. Against a background of strong medium to longer term fundamentals for the Group’s products and near-term actions to secure Xstrata’s financial position, I am confident that the prospects for Xstrata remain very encouraging.”
Rights Issue
The proceeds of the Rights Issue will be used to repay existing debt, including debt drawn under the Group’s existing facilities to finance the Proposed Acquisition. As a result, net debt is expected to reduce to approximately $12.6 billion, with gearing (defined as net debt to net debt plus equity) of less than 30%.
The Issue Price of £2.10 per New Share represents a discount of approximately 40% to the theoretical ex-rights price (TERP) of £3.48 per Ordinary Share and a discount of approximately 66% to the Closing Price of £6.23 on 28 January 2009.
Glencore, Xstrata’s major Shareholder with an interest of approximately 34.5%, has provided irrevocable undertakings to take up its rights in full, and the remainder of the Rights Issue has been fully underwritten. The issue of New Shares will be subject to Shareholder approval, in respect of which Glencore has also irrevocably undertaken to vote in favour.
The Rights Issue is one of a series of ongoing, decisive measures taken by Xstrata management to strengthen its financial position in response to the financial crisis and ensuing economic downturn. These initiatives include:
· suspending or closing higher cost or unprofitable production, including the Lennard Shelf zinc-lead joint venture and the Falcondo ferronickel operation;
· reducing production at existing operations to respond to weaker demand, including the suspension of 80% of the Xstrata-Merafe Chrome Venture’s annual production capacity and suspending longwall operations at Oaky No. 1 coking coal mine;
· continuing to drive down operating costs across Xstrata’s commodity businesses through restructurings, productivity improvements and commencement of lower cost supply;
· improved working capital management, with approximately $1 billion of cash released in the second half of 2008; and
· substantially reducing discretionary sustaining and expansionary capital expenditure, with approximately $3 billion identified for 2009, whilst retaining the Group’s growth options.
In addition to these commodity-business led initiatives, on 1 October 2008, Xstrata entered into a $5 billion Club Facility to refinance and extend the maturity of the Group’s existing debt portfolio and provide further headroom. On 2 January 2009, the Club Facility was increased by an additional $459 million to approximately $5.46 billion.
In light of the proposed capital raising, the Board has decided not to declare a final dividend for 2008. The total dividend for the year is therefore 18 cents per share, paid as the interim dividend on 10 October 2008. The Board intends to resume dividend payments to Shareholders at the earliest opportunity, while seeking to maintain a prudent capital structure against the backdrop of the macroeconomic climate and the Group’s cash flow, capital requirements and dividend cover.
Including the proceeds from the Rights Issue, after the acquisition of Prodeco, the combined impact of the actions taken by the Group to conserve cash and reduce operating and capital costs will add over $7 billion and ensure that Xstrata maintains a robust financial position, even in the event of an unexpectedly prolonged period of depressed commodity prices. This is in line with the Xstrata Group’s firm commitment to retain an investment grade balance sheet throughout the economic cycle.
Xstrata’s management will continue to focus on taking decisive action with a view to ensuring that Xstrata’s businesses remain cash positive and financially robust, including, where necessary, further reductions in capital expenditure, the suspension or closure of unprofitable or high cost operations and the optimisation of operating costs and working capital.
Acquisition of Prodeco
Xstrata has conditionally agreed to acquire the Prodeco Business from Glencore, for a consideration of $2 billion, to be satisfied in cash on the Prodeco Closing Date. The Prodeco Business is a strategically attractive asset with excellent growth potential that will add significant long-term value to Xstrata.
As part of the Proposed Acquisition, Xstrata has conditionally agreed to grant Glencore a Call Option to repurchase the Prodeco Business at any time up to the business day following the first anniversary of the Prodeco Closing Date. The aggregate consideration payable by Glencore on exercise of the Call Option is $2.25 billion, plus all profits of the Prodeco Business accrued and not distributed to the Xstrata Group and any cash paid into the Prodeco Business by Xstrata, less any amounts distributed by Prodeco to the Xstrata Group, in each case in the period since 1 January 2009.
The Prodeco Business comprises Glencore’s Colombian high grade thermal coal mining operations and associated infrastructure. The acquisition of the Prodeco Business will provide Xstrata with access to a high quality, low cost thermal coal complex with excellent growth potential in a strategically attractive region with the ability to supply the European and North American energy markets.
The Proposed Acquisition will add significant value to the Xstrata Group by:
· enhancing the Xstrata Group’s industry leading thermal coal portfolio through the addition of long-life high-quality thermal coal assets;
· consolidating the Xstrata Group’s strategic position in Colombia, enhancing Xstrata’s competitive position in the important European market and positioning the business for growth in the United States market for low-sulphur, high-quality thermal coal imports;
· offering significant further brownfield growth potential from the purchased assets and optionality through future growth opportunities in the region; and
· leveraging Xstrata Coal’s management expertise and operational experience to deliver operational upside through productivity and technical enhancements.
The Effective Date for the acquisition will be 1 January 2009.
Since Xstrata’s substantial Shareholder, Glencore, is the vendor of the Prodeco Business, the Proposed Acquisition is a related party transaction for the purposes of the Listing Rules, and requires independent Shareholder approval. The Rights Issue and the Proposed Acquisition are inter-conditional. Shareholder approval for the Proposed Acquisition and for the resolutions required for the Rights Issue will be sought at an Extraordinary General Meeting to be held in early March 2009. A Circular including the notice convening the Extraordinary General Meeting and a Prospectus in connection with the Rights Issue and the Proposed Acquisition are expected to be published within the next week.
JPMorgan Cazenove and Deutsche Bank are acting as joint sponsors, joint financial advisers and joint brokers to Xstrata and J.P. Morgan Securities Ltd. and Deutsche Bank are joint underwriters of the Rights Issue. Rothschild is acting as independent financial adviser to Xstrata in connection with the Proposed Acquisition.
