On a crystal clear winter’s day in Trafalgar Square last month, Mick Davis, dressed in a leather jacket and open-necked blue shirt, was the star turn as he battled for Israel’s cause amid the demonisation which erupted around Israel’s Gaza operation. As chairman of UJIA, South African-born “Mick the Miner”, as he has been dubbed by the financial press, is a passionate supporter of Israel’s cause.
Now he finds himself battling in another arena. As the chief executive of Xstrata — the London-quoted mining group — and a skilled financial engineer, Mr Davis and his group rode the commodities boom. Like the bankers, the mining chieftains thought they were invincible, building huge new global empires based on soaring prices for coal, ores and other minerals. They were starting to think that they were part of a new paradigm.
Rocketing demand from the emerging Asian giants China and India drove commodity prices ever higher, carrying the share prices of once unfashionable mining stocks with them.
I can remember a conversation with Paul Skinner, until recently chairman of that most British of mining groups, Rio Tinto. He had convinced himself that whatever happened to the Western economies, the boom in commodity prices was here to stay and the world was in for a 30-year upswing in prices. Even if the rich industrialised countries collapsed into recession — which they did — the fierce demand in China for growth and Western goods would sustain the boom.
Whenever anyone parrots the phrase “new paradigm” it is time to be cautious. There is nothing new under the sun when it comes to the trade-business cycle. Economies and markets inevitably go through boom and bust phases despite the hubristic claim by Gordon Brown to have beaten the odds.
Mr Skinner, an enthusiast for the new commodities paradigm, has now stepped down from Rio Tinto after presiding over a top-of-the-market acquisition of Alcan paid for with debt. The miner, with antecedents dating back to the mid-19th century, is now turning to Beijing investor Chinalco to raise up to £10 billion of new capital, and the warm glow of the surge in demand for iron ore and other minerals has long past.
Mr Skinner had hoped to become the next chairman of BP. But some leading shareholders have objected on the grounds of his Rio record.
Mick Davis finds himself in similar difficulties. For years, as far as the London investment community was concerned, Mr Davis walked on water. He was among those responsible for bringing the mining group Billiton to London where it engineered a merger with Australia’s BHP, creating one of the world’s raw material giants.
So impressed was Ivan Glasenberg, who heads the secretive Swiss-based commodity trading group Glencore, that in 2001 he called the young BHP finance director Mr Davis and made him an offer he couldn’t refuse.
Glencore had a 40 per cent stake in a then underperforming mining group Xstrata, with a market value of $500million, and wanted Mr Davis to run it. By happy coincidence it was the start of a new millennium and world commodity prices were heading for the stratosphere.
Mr Davis swung into action, raising debt and equity before buying Glencore’s coal company Enex. It was the start of a series of acquisitions which saw Xstrata become one of the world’s largest mining finance houses. Davis’s particular advantage was his ability to use his accounting skills to cut costs, while taking advantage of surging natural resource prices. Investors in the City and worldwide came to trust his judgment and loyally backed his merger adventures.
But Davis’s expansion was built on a debt mountain of $16.3bn, in a period when credit has been hard to find. This was fine when Xstrata was supported by an inflated share price and high metal prices. But most of the major commodities including copper, nickel, zinc have fallen at least 50 per cent from their peaks. And with the industrial world paralysed by the deepest recession since the Second World War, there may be more falls to come.
In the last week of January, Davis, in what was initially seen as a brave move, sought to bolster his group’s cash resources with a bold £4.1bn rights issue, at a 40 per cent discount to the market price of the company’s shares.
But there was a catch.
The group’s biggest shareholder, Glencore — still run by Davis’s original sponsor, Ivan Glasenberg —was unwilling to put up the cash, or to allow its shareholding in Xstrata to fall. So it proposed to transfer two Colombian coalmines owned by a through a company called Prodeco to Xstrata.
This has not pleased big battalion investors in the Square Mile. Glencore, it is argued, is being offered privileged terms. If the purpose of the issue was to raise cash, then the asset swap with Xstrata’s biggest investor means there is less immediate cash in the bank.
But what really disturbs them is that Glencore had been granted an option to buy back the coal miner in 12 months’ time. What is seen as a good deal for Mr Davis and Mr Glasenberg is viewed as disadvantaging other shareholders.
Mr Davis, like the bosses of the other mining companies, had a brilliant run. But now that tide of high commodity prices has ebbed Xstrata like the other miners looks a lot less alluring. More seriously for “Mick the Miner”, the hard-earned trust he built among investors has been eroded.
