DEALTALK-Glencore may seek partner to buy back coal mines

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* Determined to exercise option for Prodeco operations

* May seek partner as faces $2.5 bln option cost

* Glencore has higher working capital requirements

* S&P says buy back would not affect credit rating

By Eric Onstad

LONDON, Jan 28 (BestGrowthStock) – Commodity trader Glencore
[GLEN.UL] is determined to buy back the prized Prodeco coal
operations in Colombia from mining group Xstrata (XTA.L: ), but
may chose to bring in a partner to do so.

Swiss-based Glencore was forced to give up the Prodeco
operations last year when it was short of cash, but it has an
option to repurchase them which expires in coming weeks — an
option which sources close to the situation say Glencore is keen
to exercise.

Yet a need to avoid undue pressure on its balance sheet may
lead the group to sacrifice a share of the spoils, opening an
opportunity for someone else keen to get involved in the
high-grade, low-cost operations that include two open pit mines,
port facilities and part ownership of a railway in the South
American country.

After a rebound in commodity prices, Glencore could manage
by itself to pay the $2.5 billion required without a credit
ratings downgrade, but it may prefer to spread the risk.

Sources said the company was considering a range of options
regarding Prodeco and was taking into consideration its higher
working capital requirements.

Glencore, Xstrata’s biggest shareholder with a 35 percent
stake, must decide quickly since it holds a call option for
Prodeco that expires on March 3.

“I would say that a JV (joint venture) is more likely. If
anything the credit crisis has made them, and the mining sector
as a whole, a bit more conservative than they used to be and
they are keen to maintain a liquidity cushion,” said Henri
Alexaline, senior credit analyst at BNP Paribas.

“You could see a financial sponsor or you could see a hard
asset company, both of them would make sense.”

He did not name any companies that might be interested.


Glencore agreed to sell Prodeco last year to pay for its
share of a $5.9 billion rights issue by Xstrata since it did not
have enough cash.

It got an option to buy Prodeco back within a year for $2.25
billion plus any capital spent by Xstrata on the mines,
estimated at around $300 million. [ID:nLT603843]

During heated discussions leading up to the sale, Glencore
insisted Prodeco was worth around $4 billion, mainly due to the
value of inferred resources that could be developed in the
future, one of the sources said.

Last month, Glencore improved its cash situation after
raising $2.2 billion by selling convertible bonds that brought
the private firm closer to a public listing. [ID:nLDE5BM0K6]

But rising commodity prices also meant rising requirements
for working capital, since as a trading firm Glencore now had
higher amounts of receivables and inventory to finance on its
balance sheet, said one of the sources.

The company was chastened during the downturn when it faced
high debts and tightened liquidity. In December 2008, Standard &
Poor’s downgraded Glencore’s credit ratings and in March last
year Moody’s changed its outlook to negative.

In a report this month, however, S&P maintained its “stable”
outlook and said Glencore would be expected to keep its current
credit ratings even if it bought back the whole of Prodeco by


“The company is likely to be evaluating a number of options,
whether it’s an outright repurchase or whether it’s some kind of
joint venture or a combination with a third party,” said Alex
Herbert, credit analyst with S&P.

“Clearly there is some uncertainty around the Prodeco
transaction. There has been some additional financial
flexibility within the rating because of the upswing in
commodity prices and the convertible bond issue in December, but
that would decline if they paid for the whole call option for

Glencore may also be wary of the outlook for commodity
prices, which have faltered recently on worries about the impact
on metals demand from tightening of credit in China, the world’s
biggest consumer of copper and iron ore.

“We also see risk about the broader commodity price
environment. We do see some downside risk on the prices
depending on the sustainability of the global economic
recovery,” Herbert said.

Copper prices (MCU3: ) more than doubled last year, but have
shed nearly 10 percent from their peak earlier this month.

While finding a partner would help cut Glencore’s cash
outlay, it would also have to hammer out an agreement on
valuation, operations and the ownership structure. Perhaps more
significantly, it would have to compromise on a past preference
to keep full control of its operations.


(Editing by David Holmes)

DEALTALK-Glencore may seek partner to buy back coal mines