Trafigura – Playing Cat & Mouse with Nyrstar
For those who recall the Glencore takeover of Xstrata a key feature was the disposals forced upon the predator to get the deal past regulators and the Chinese. The main thing that concerned regulators was the dominance of Glencore in the zinc trading space where it had confessed to having something like 65% of the global zinc trading activity pass through its hands at the time that it “opened the kimono” in its prospectus for listing on the LSE. This set alarm bells ringing when end-users started envisioning what Xstrata’s Zinc mines combined with Glencore’s trading weight might imply. The chief result was a requirement that Glencore release some of its contracted market share and liquidate its shareholding in Nyrstar (NYR.BR) the leading zinc/lead refiner.
Ironically the way things are going the company that Glencore was told to distance itself from has now fallen into the orbit of Glencore’s main competitor with implications as well for those suppliers and end-users dependent upon Nyrstar’s strategic position in the supply-chain.
In this note I shall look at the implications and potential outcomes.
This company is a Dutch-based trader and mimics Glencore in many ways. It has been the most forward in following in the footsteps “of the Master” in acquiring control of mining properties. It also has its roots in the Marc Rich empire. Initially focused on three regional markets – South America (oil and minerals), Eastern Europe (metals) and Africa (oil) – Trafigura has since diversified and expanded globally and operates from 81 offices in 56 countries. Positioning itself in oil makes it distinct from Glencore where coal has been the main energy exposure. It has, for instance, a vast service station empire in Africa.
The company has also been notable for making mine purchases in Peru, acquiring the Azulcocha mine from Vena Resources and then acquiring all of Iberian Minerals to get itself positioned in base metals in Peru. This brought Trafigura the Condestable copper mine and the Aguas Tenidas mine, which produces copper, as well as zinc. Trafigura is obviously as comfortable in being 100% owner of mines as Glencore and we should see more of these types of deals in the future. A combination between Trafigura and Nyrstar would make lots of sense.
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Nyrstar’s Sorry State
The company was formed from merging the Zinc/Lead smelting businesses of Belgium’s Umicore and Australia’s Zinifex. It was floated in 2007 at 20 euros per share, but currently languishes at ten percent of its initial issue price. In recent times the company has been weighed down by the low Zinc & Lead prices, setbacks with its mining expansion and the failure of its Finnish supplier Talvivaara, which applied for bankruptcy in the latter half of 2014. Most recently, Nyrstar vended its Coricancha mine in Peru to Great Panther, in what was the first retreat from the “soup to nuts” strategy put together by the management in the wake of the listing of Nyrstar on the Brussels Stock Exchange.
Nyrstar has since September raised 600 million euros with a bond yielding 9% (primarily to replace maturing debt) and a share issue to transform its site in Port Pirie, Australia and to upgrade its smelters.
We might also mention that Nystar’s refineries are also major producers of the by-product specialty metals that occur in Lead/Zinc mineralisations, such as Indium.
Nrystar and Trafigura – Having it Both Ways
With Glencore out of the way at Nyrstar, Trafigura has worked itself out a pretty nifty relationship with Nyrstar, but the problem is that Nyrstar’s shareholders might not be similarly so thrilled with the way it is playing out. Market reports indicate that Trafigura started, in September 2014, to build a stake which now amounts to at least 15%, making it the company’s largest shareholder. Of course a merger between the two would make the most sense, as it would be synergistic and create a stronger competitor for Glencore in the Zinc trading space. As we have already noted competition authorities forced Glencore to divest its stake in Nyrstar and unravel some trading relationships with Nyrstar when it took over Xstrata in the process becoming even more dominant in the metals Nyrstar smelts. Thus one could see that maybe pressure would be put on Trafigura in a proper merger with Nyrstar to reduce its strong position also.
Out with the Old…
This was made more obvious in November 2014 when Nyrstar “ousted” its chief executive, Roland Junck, and replaced him temporarily with its Chief Financial Officer Heinz Eigner. Nystar claimed that Trafigura had no bearing on the move while Trafigura declined to comment.
Reuters had reported earlier that market sources had told it that Trafigura was aiming to influence board decisions and tighten its grip on the world’s largest zinc producer.
Junck’s track record at the helm Nyrstar had been disappointing, arguing his strategy to invest in buying mines in particular was poorly executed and failed to achieve its stated objective on production or costs.
Trafigura has already tried to influence the composition of the board of another company in which it invested. After building an 18 percent stake in EMED Mining it proposed last month to oust all but one of its directors and substitute them with its own nominees.
The New Helmsman
Considering that Junck was ousted in November of last year and replaced with a temporary CEO, a new one did not start in the job until August 2015 when Bill Scotting was appointed to the role. Prior to joining Nyrstar he was Chief Executive Mining at ArcelorMittal. He joined that group in 2002 as Director of Continuous Improvement, and subsequently also held the positions of Head of Performance Enhancement and Head of Strategy. He started his career as a metallurgist with BHP in Australia and has also worked at McKinsey & Company and CRU International. He holds a Masters of Business Administration from Warwick Business School in the UK and a Bachelor of Science (Metallurgy) degree from the University of Newcastle in Australia.
The issue of who controls Nyrstar is a key one for users of Zinc and Lead around the world. Having seen the welcome unwinding of the Glencore relationship only a couple of years ago we now see it being put together again but with another major trader as the puppetmaster. Moreover at least in Glencore’s case there was an element of arms-length distance to the arrangement. In the case of the latest interloper, it is seemingly playing the role of kingmaker in selection of Nyrstar’s key personnel. If this was a proper takeover alarm bells would be ringing in the corridors of anti-trust agencies in the EU and beyond. Instead there might have been a de facto coup d’état with effective control passing to the trader without any red flags on market dominance having been run up.
Thus, for the moment nothing is happening on the official takeover front and instead we are getting that current bugbear of ours, the unofficial takeover, where holding a small percentage gives a major player all the benefits of having control without having to make other shareholders a decent offer.
So for players in the Lead/Zinc space (and for regulators) the question of the day should be T+N = ?
Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>