X2 Resources: Mick the Miner's big comeback
After resigning from Xstrata in the wake of bitter merger negotiations with Glencore, Mick Davis is on the comeback trail with his new venture X2 Resources. Mining Technology recounts the fractious months leading up to Davis's departure from Xstrata and analyses his plans for X2, a new and well-backed force in the natural resources sector.
For the past 20 years, Mick Davis has cast an impressive shadow over the mining world. After transitioning to the mining industry from South African state utility Eskom in 1994, Davis has carved out a reputation as an extremely successful value-adder and a specialist in mergers and acquisitions (M&A) in the resource sector.
As chief financial officer and executive director of Billiton between 1997 and 2001, Davis played a key role in the merger of Billiton and Broken Hill Proprietary Company of Australia, forming BHP Billiton, planting the seed for what is now the world's largest mining company.
But the man who has become variously known as Mick the Miner, Big Mick and The Digger truly made his name as the CEO of Xstrata, a company dating back to 1926 that was revitalised in 2002 when it acquired $2.5bn of unwanted Australian and South African coal assets from Glencore, which was led by Ivan Glasenberg, Davis's old school friend from Port Elizabeth, South Africa. The sale granted Glencore a 34% stake in the rebooted Xstrata; old friends The Digger and The Dealer - as Glasenberg had been dubbed for his trading wizardry - had come together.
Under Davis's stewardship, Xstrata swelled over the next decade from a $500m coal producer to a $50bn mining titan. Much of this explosive growth was driven by the CEO's proactive M&A programme, which saw Xstrata absorb Australian coal and base metals miner MIM Holdings in 2003 at a cost of $2bn, and acquire Canadian nickel and copper producer Falconbridge in 2006 for more than $18bn. Davis's M&A record isn't spotless - a $10bn offer for platinum producer Lonmin in 2008 was swiftly rebuffed - but his role in hauling Xstrata into the big leagues is beyond question.
Given Davis and Glasenberg's friendly relations, there was natural speculation that their respective companies, which were already closely linked through Glencore's sizeable stake in Xstrata, would eventually merge. Indeed, the original plan was reportedly to create 'Glenstrata', a true merger of equals, with Davis retaining his position as CEO and Glasenberg shifting to deputy CEO and company president.
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As the whole industry now knows, things didn't pan out that way. In the end, the incredible complexities involved in bringing the two massive companies together conspired to turn The Digger and The Dealer from allies to antagonists, and from antagonists to rivals.
At a key moment when the deal looked close to collapse in mid-2012 due to Davis and key Xstrata investor Qatar Holding insisting on a better price for shareholders, Glencore agreed - at a meeting with the Qatari investors at a secret London location, reportedly attended by former UK prime minister Tony Blair - to stump up the extra cash to push the $44bn merger through, at long last, in May 2013.
The major stipulation from Glencore's side was the ousting of Davis in favour of Glasenberg as CEO of the new Glencore Xstrata PLC, overturning the £220m retention deal that had previously been in place for Davis and his senior management team. The merger of equals morphed into something bearing a greater resemblance to a hostile takeover, and Davis and Glasenberg, once close partners, are now reportedly not on speaking terms.
Despite being left out in the cold at the end of the long takeover battle and the loss of the eye-watering golden handshake, Davis could hardly be said to have been left in the lurch financially. Xstrata's erstwhile CEO walked away from the merger without a job, but he did receive nearly £75m in cash payoffs and share options, along with access to 30 hours in Xstrata's private jet and the right to sub-let Xstrata's Mayfair office until March 2017, with nearly a year provided rent-free. In short, he didn't need a job, and it wouldn't have been at all surprising to hear that Davis, now 56, was planning to retire to a private island somewhere.
However, it appears that withdrawing from the world of work, and the mining sector in particular, was never on the cards for Davis. Reports from as far back as May 2013, just days after the Glencore-Xstrata deal finalised, suggest that Big Mick - a nickname that no longer quite fits after a recent period of dramatic weight loss - wasted no time planning his comeback. Davis hired Goldman Sachs to help him prepare a new fund to buy key mining and commodities assets; it came as little surprise, given his previous experience, that he planned to buy back into the business through a campaign of acquisitions.
Behind the scenes, Davis was putting together a team, pulling almost exclusively from the pool of former Xstrata colleagues. Indeed, even the name of the new venture, X2 Resources, seems to be a conscious acknowledgement of the Xstrata link. By the time X2 was officially launched in September 2013 with the aim of becoming a "mid-tier diversified mining and metals group", its key management team was filled with Xstrata alumni, including former CFO Trevor Reid, head of group business development Andrew Latham and group head of strategy and corporate affairs Thras Moraitis, all of whom had been Xstrata mainstays for a decade or more.
X2 launched in September with £1bn of combined investment from Hong Kong-based commodities trading house Noble Group and private equity group TPG. In March 2014, it was revealed that X2 had increased its acquisitions war chest to $3.75bn ($2.5bn of committed funding and up to $1.25bn of conditional equity funding), enough to bring significant mining assets within reach.
Investing against the grain: the future of X2
Now that Davis and X2 have the requisite financial muscle, the only question that remains unanswered is how they intend to use it. Back in March, Davis was optimistic about the timing of the venture; declining commodity prices have prompted many major mining companies to reassess their business models and consider shedding non-core weight.
For X2, this means that there should be no shortage of assets to buy, and hopefully at a price that allows for significant growth once the cycle picks up again. As Forbes contributor Tim Treadgold pointed out in 2013, it's a manifestation of a famous motto by US tycoon Warren Buffet: "We simply attempt to be fearful when others are greedy, and to be greedy only when others are fearful."
"We have attracted a very prestigious core group of large-scale, high-quality investors who share our vision of building a new mining group with the potential to generate attractive returns through the cycle," said Davis in March. "We believe the timing for this venture remains very opportune and we will now focus increased attention on starting the investment process."
This counter-cyclical strategy paid massive dividends for Xstrata, so it's no surprise that Davis is attempting to repeat the trick for this next venture. "If he was to acquire coal assets at this point he'd be doing what he's got a history of doing: buying assets at the bottom of the cycle and therefore benefiting extremely when the cycle turns," Investec analyst Hunter Hillcoat. "It's a classic Mick Davis tactic."
Speaking to the Financial Times in September 2013, Bernstein Research analyst Paul Gait agreed that investing now and waiting for the landscape to change is a worthwhile gambit but warned that today's industry conditions would make it very difficult to cash in to the extent that Xstrata did.
Mining giant BHP Billiton has signalled a possible demerger of mining assets worth an estimated £11bn as the company sharpens its focus on its core businesses.
"There will never be another supercycle where prices of commodities such as iron ore go up tenfold," Gait said. "What we have now is a cyclical low, which feels like the bottom, and which gives him the chance to create plenty of value if he picks assets carefully. It just won't be the same order of magnitude."
With speculation rife that X2 would focus on well-traded commodities like base metals and coal, it didn't take long for reports to emerge that X2 had identified its first potential target. BHP Billiton, the formation of which Davis was intimately involved in as CFO of Billiton, is one of the mining majors looking to streamline its operations, with assets like nickel, thermal coal and aluminium on the chopping block.
X2 is reportedly hoping for an $8bn loan from JPMorgan to help bankroll a formal bid for BHP Billiton's flagging thermal coal business, as well as mulling a potential bid for its nickel division, including the Nickel West complex in Western Australia. Nickel is especially attractive due to rallying prices after Indonesia, the world's largest nickel ore miner, banned ore exports in January this year.
Though it looked like Ivan Glasenberg was left on top of the world after the Glencore-Xstrata deal, now the same industry downturn that forced an unseemly $7.7bn writedown of Xstrata's value after the merger is playing into the hands of his colleague-turned-competitor on the comeback trail. X2's success is far from certain - the right purchase price for assets and a healthy industry rebound will be essential - but it appears the tale of The Digger and The Dealer may yet see a third act.