enter the next xstrata

from Minesite December 1st:


Coal of Africa: A Chip Off The Old Block?


By Our Man in Oz



Theres no smoke without fire, though no-one has yet provided a compelling explanation for the smoke now billowing up around Coal of Africa (CZA). Reasons offered for the recent increase in investor interest and the accompanying flurry of high-brow broker research reports have included the possibility of a potential takeover bid, and/or the imminent receipt by the company of overdue new-order mining rights. For Minesite Rob Davies took a squiz at the company not so long ago, probing the mining rights and takeover rumours as recently as October 1st. With that in mind, it was with a degree of concern that he might not find much fresh to say that Minesites Man in Oz decided to peer into the smoke himself. But it came as quite a surprise to when he got what might be the first glimpse of the fire within.
The digging started where it always should, with a visit to the man at top, CZAs chief executive, Simon Farrell. For anyone who understands the free-wheeling lifestyle of Australia this was not a difficult task. In fact the hardest part was finding a parking spot close to Farrells Perth office, which is delightfully, if not conveniently, located in an old brewery on the north bank of the Swan River. Simon, being Simon, was late, though that provided an opportunity for a chat with another occupant in the office same office complex, Eurogold chairman, Peter Gunzburg, a man who has kept such a low profile that he must be up to something. But he can wait.

When Simon breezed in with Diet Coke in hand it was quickly down to business, and while the conversation flowed freely, Minesites Man in Oz had the feeling that not everything was (or could be) revealed. Minesites man and Simon have been acquainted for nigh on 40 years now, and some signs are telling to old associates, even if the words are unspoken. So, rather than absorb the official line it seemed time for Minesites (nosy) Man in Oz to undertake more subtle inquiries, to delicately tease out the state of play at CZA, and why try to find out why some well-connected people in Perth are pointing at CZA and saying havent you seen something like that before?

Lets tick off a few obvious points. These are tough times (point 1). Coal is a marvellous base-load, cash-flow business (2). It can be used as a lever to fund the acquisition of other assets (3). Financiers, if not mining types, are excited about the concept (4). Oodles of curiously well-sourced (and positive) research is streaming into the market, a sign that a deal is cooking (5). There is chatter of a substantial boost to the management team (6). Now, look back in time, to around 2001, when the Swiss commodities trader Glencore was trying to entice investors into the float of its coal assets in Australia and South Africa, a deal which failed that year because of the terrorist attacks on New York, but which succeeded outrageously well soon after, with the launch of a business called Xstrata.

Coal was at the heart of Xstrata back then, and Glencores baby then went on to consume copper (and coal) giant, MIM Holdings, to try to buy WMC, to succeed with Falconbridge, and finally to pursue the biggest target of all, Anglo American. Driving Xstrata was the combination of Glencores naked commercial aggression, and the personality of the boss, Mick Davis, the man who really wanted the chief executives job at BHP Billiton, only to have to watch his one-time mentor, Brian Gilbertson, do the job for a few months before being replaced by a young American, Chip Goodyear who has, in turn, handed the baton to Marius Kloppers.

That leaves a question hanging. Whats Chip up to these days? The answer is that he almost took the top investment job with the Singapore governments sovereign wealth arm, Temasek, but didnt and is now regarded as one of the best (currently unemployed) mining executives in the world. How tempting it must be for a team of fat cat investors, backed by a commodities trading firm, to attempt a repeat of the Xstrata story. The timing could hardly be more perfect. Asset values are low, with plenty of willing sellers. The resources boom is back, and current market conditions seem to offer a perfect opportunity to anyone with equity capital and skilled management to stitch together a big new mining play that would feed raw materials to China, or India. India, indeed, is the more likely participant in any deal involving CZA, given that ArcellorMittal, Indias steel champion already has a 16 per cent stake in the stock.

It is not stretching the bounds of imagination too far to see Chip fielding calls to take up a major new challenge, especially as he is still a relatively young man in his early 50s having retired from BHP Billiton aged just 49. CZA might seem small beer today, but so was Xstrata just eight years ago. A series of steps are being taken to increase CZAs size and stature, including its elevation to the main list of the London Stock Exchange, and all the fund-raising potential that this implies. It is also not drawing too long a bow to point out that Simon and Chip were students around the same time at Wharton Business School in the US. Or to imagine that CZA wants to bring the background chatter about its future direction to a head.

But if Simon doesnt want to spill the beans, what then can be read into the broker research? Lots, actually. Macquaries South African office loves the CZA story, and has set a 12 month share price target of A$3.16, close to double the current A$1.71. Cazenove has a similar view. Edison told market participants three weeks ago that CZA was heating up after its acquisition for more coal assets in South Africa, as the company showed perhaps a touch of the Xstrata-like aggression. And Morgan Stanley issued an initial report in September containing an overweight recommendation, and a clue to future management moves, noting that CZA may need to expand its team for delivery of its future expansion plans (hello, Chip?).

Of course, all this could be the vivid imagination of Minesites Man in Oz given that he has always had a soft spot for the Swan Brewery. Some of his most memorable moments some 40 years ago were inspired by its products, and still are today.