Mick Davis and resource investing: 2

As promised, here is the second article on Mick Davis. Again, it is a great read for a little glimpse into the investing and business development side of the mining industry. This article focuses more on his current venture, X2 Resources and its development. Have a read and let me know what you think.

X2 Resources

Building another resource giant? Photo: X2 Resources

One of the best quotes about Mick Davis, the founder CEO of Xstrata, comes from former JP Morgan banker Ian Hannam who assisted with a number of transactions for Davis.

He said: “There are four people who claim they brought Billiton to London: [Brian] Gilbertson, myself, Adrian Coates [a well-known banker in London, then at HSBC] and Davis. The answer is – it was Davis. He saw the opportunity and managed to persuade Gilbertson that it would create a platform to build a new company to rival Rio [Tinto]”.

Since the listing of Billiton in 1997, Davis has been the primum mobile of some of the highest profile mining deals in London, including Billiton’s merger with BHP, a string of transactions during the decade or so during which Xstrata was built into the fourth largest diversified miner, Xstrata’s ultimately frustrated ‘merger of equals’ with Anglo American, and finally, the marriage of Xstrata to Glencore in 2013, the largest transaction in the City that year.

The Glencore-Xstrata combination was also described in terms of ‘a merger of equals’ when first unveiled in 2012. The fact that the final arrangement ended with the departure of Davis, and nearly all of his senior management team, suggests that in global mining finance, mergers are illusory, created to save the actors from over-paying for those acted upon.

That’s why it’s so tempting to style Davis’s swift return to the UK’s corporate scene as head of X2 Resources as an act of ‘unfinished business’, although, Davis was off stage so briefly, it’s hard to describe X2 Resources as a return so much as a continuum.

In March, four months after shareholders in Xstrata vetoed retention packages for key management, there were rumours Davis was planning a private equity firm. A month later, he told Glencore CEO, Ivan Glasenberg, that he wouldn’t see out the six-month handover period at Glencore Xstrata that had been previously agreed. By September, Davis had raised a billion dollars in private money. The show was on the road, and in double quick time.

“No doubt some people have the view that X2 is unfinished business for Mick. I doubt it,” said Eugene King, an analyst for Goldman Sachs. Other analysts agree. “I think Mick’s probably a bit too smart for that,” said Des Kilalea, an analyst for RBC Capital Markets.

Both believe X2 Resources is driven by the opportunity Davis recognises in a mining market that is in temporary abeyance. It is eerily similar to 2002, the year Davis founded Xstrata: commodity prices are depressed, just as they were 12 years ago, debt is high especially among the corporates, and share prices are low. Pressure is everywhere.

Thras Moraitis, who at X2 Resources reprises his Xstrata role as head of strategy and corporate affairs, said the decision to form a new company was simply a matter of deciding whether playing golf was a satisfactory alternative to building another mining company. “In the end, there was no option,” said Moraitis.

“Mick certainly has nothing to prove,” he said, scotching tittle-tattle that X2 is Davis’s revenge on Glasenberg who, after agreeing to pay a premium for Xstrata, had Davis eased off the pedestal he was at first forthright in providing at Glencore Xstrata.

Now 56, Davis is his composed self: older, leaner, but having retained that disconcerting way of responding to questions before his interlocutor has finished forming them. “We all put money in. Every one of the partners has put money in,” he said when asked about the level of personal risk in the founding of X2 Resources.

No doubt some people have the view that X2 is unfinished business for Mick

So far, Davis has raised $3.75bn from seemingly disparate investors which include TPG Capital, a private equity firm with about $58bn under management, but which has never invested in mining before; Noble Group, the Singapore-based trading house, and three other unnamed sovereign wealth investors.

Goldman Sachs has been lined up to help broker deals re-establishing a long-time relationship with Brett Olsher who assisted Davis on many of its 40-odd transactions at Xstrata whilst co-head of Deutsche Bank’s global merger and acquisitions, a post he vacated in 2010.

Currently, Davis is in discussion with a further group of investors, and there’s talk JP Morgan is scuttling to provide $8bn in debt.

Said Davis: “We just want to raise a bit more money to get around about $3.5bn to $4bn within the fund itself. We think that’s a very good number for us to actually have in terms of doing the sort of transactions that we feel we’d like to do,” he said.

“What I can say to you is I think we could raise more debt from the banks than would be prudent for us to borrow. So without commenting on whether JP Morgan would be good for $8bn or not, we could raise from the banking sector a lot of money, but we wouldn’t do that. Depending on the nature of the assets we invest in, the company would be able to take quite a bit of leverage, but not the sort of leverage that makes us look stupid.”

Team intact

Davis is speaking from X2 Resources offices in London’s Mayfair in the same building Xstrata inhabited. In terms of a farewell package with Glencore, which also included access to that Xstrata private jet everyone talks about, the property can be sub-let until 2017. According to The Guardian, the UK newspaper, the first year is rent-free.

More importantly, Davis departed Glencore Xstrata with most of his senior team in tow. In a rare moment of public opprobrium, Davis on November 20, 2012 accepted Xstrata shareholders’ vote not to allow senior management retention salaries, but he warned them of the long-term effects of doing so.

“I regret the decision of shareholders not to approve these retention arrangements for the members of my senior and operational management deemed crucial to the success of the combined group as, in my view, this introduces unnecessary risks to the merged company’s future value proposition,” he said.

What I can say to you is I think we could raise more debt from the banks than would be prudent for us to borrow

Paul Gait, an analyst at Sanford C. Bernstein & Co., told Bloomberg News on November 15, 2012 that failing to retain Xstrata staff would have a price of its own. “We don’t think Glencore has the depth of operational management, given the size and scale of the mining business versus the mining business in Xstrata, to make sure the value isn’t compromised in this transition without the Xstrata management,” said Gait.

The other risk was that a potential competitor – such as X2 Resources – would walk away with the expertise. In fact only 1 of the 9 members of Xstrata’s executive committee chose to stay with Glencore post-merger with 5 joining X2 Resources.

In addition to Moraitis, former Xstrata CFO, Trevor Reid has joined X2 Resources as well as the CEO of Xstrata Nickel, Ian Pearce and chief legal counsel, Benny Levene. Former head of Xstrata business development Andrew Latham has also joined X2 Resources. “So the team is the same and the team has worked together for a long time,” said Davis.

“One of the great successes of Xstrata was the fact that it actually retained for all this period of time all its key players.

“We had very few, even at the operations, leaving for the sake of leaving. I think they just liked the feel of the company and for me to work with people who I’ve worked with before, is actually good.

“We’ve got a couple of new people in here, but basically it’s the same team and Brett is now with Goldman Sachs.”

One of the key takeaways for me from watching this development is Mick’s focus on taking his long time, highly experienced and proven executive team with him into this new venture. This is surely a cornerstone to building a successful mining house (pun intended). This team has come with him from the foundational phases of Xstrata and as the article mentions, has concluded some 40 transactions together. It would be hard to find a more experienced and “gelled-together” team in the industry. With almost US$ 4 billion in funds raised, it will be very interesting to watch as they set out on the trail.

One commentator in the original article mentioned that he thinks that this venture might end up like Schumacher’s return from retirement… I am not convinced that this is a worthy analogy… What do you think?

The original article, written by David McKay (Miningmx) can be found here.


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