TheDeal: Austerity Bites for Glencore Xstrata Chief Advocate

NEW YORK (The Deal) -- It is hard to know whether to admire the chutzpah of Glencore Xstrata (GLNCY) CEO Ivan Glasenberg or marvel at his apparent lack of self-awareness.

Earlier this week, as he effectively admitted that he had paid $8.8 billion too much to secure Glencore International $34 billion acquisition of Xstrata he took to Bloomberg to congratulate rival mining companies for following his advice and ending their profligate ways.

Timing may have tainted Glasenberg's message, but his contention that mining companies' free spending is a thing of the past (for the time being) is beyond doubt.

New investment by the big mining companies has fallen off a cliff, and with it dealmaking, as they tighten their belts and crimp production in the face of slowing demand. Cash once earmarked for acquisition and development is now being funneled into debt reduction--and to a lesser extent dividends--as companies seek to appease stockholders following tens of billions of dollars of asset writedowns.

Evidence of the new austerity was on display elsewhere on Tuesday, Aug. 20, just as Glasenberg was patronizing his fellow mining company CEOs, when BHP Billiton ( BHP) said it will spend $2.6 billion by 2017 to build shafts and infrastructure at its Jansen potash deposit in Canada.

To understand how spending $2.6 billion fits with the new austerity it has to be remembered that BHP had, less than three years earlier, planned to spend $39 billion to buy Canada's Potash of Saskatchewan and make potash a "fifth pillar" of its operations. At about the same time it had suggested that production at Jansen could commence by 2015, a target that would have necessitated spending the best part of the $12 billion to $16 billion that analysts say the project will cost.

BHP CEO Andew Mackenzie said Jansen might now begin production by 2020, but warned that he would "enter the potash market only when the time is right." In the meantime, he will be searching for a way to further cut BHP's investment in the project by roping in a partner to share development costs.

Some have chosen to see BHP's retreat from potash as a reaction to the recent fracturing of a Russian cartel that controls about 43% of global exports and the resultant potential for a sharp drop in the price of the fertilizer input. JSC Uralkali in July exited that cartel, which effectively shares the global market with its Canadian counterpart. But that interpretation ignores the fact that BHP had initially insisted in 2010 that it would abandon the cartel pricing system if it won control of Potash, though it later backpedaled in a bid to win Canadian support for the deal.

The reality is that investment, particularly in high-risk greenfield sites, is virtually taboo in the new age of austerity. Glasenberg may be prone to overstating his own influence, but he can rightly claim to have been one of austerity's earliest proponents.

The former commodity trader's dislike of greenfield assets was well established prior to Glencore's acquisition of Xstrata. Glencore's management, which took over at the merged company, had long been widely expected to offload many of Xstrata's undeveloped sites, including the $5 billion Koniambo nickel operation in New Caledonia.

Barclays Capital analyst David Butler posited that the majority of Xstrata's $7.1 billion in writedowns announced Wednesday were probably linked to Koniambo. Glasenberg might yet reflect that if only others had ignored his austerity message a little longer and stuck with dealmaking his company might have been saved the pain of these sweeping markdowns.

-- Written by Paul Whitfield in New York

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