MAC/20: Mines and Communities

Testing the sterling in Glencore's record

Published by MAC on 2005-08-16

Testing the sterling in Glencore's record

By Eric Reguly, Canada Globe and Mail

Tuesday, August 16, 2005

If you didn't like the idea of a Chinese company buying Noranda and Falconbridge, you should be delighted the two Canadian mining players are instead going to a Swiss concern, called Xstrata. Switzerland is the symbol of European purity. The Swiss are polite, don't toss wrappers on the ground and are capitalists too! They are decent folk buying decent Canadian companies.

You might also be deluding yourself. Xstrata is 40-per-cent controlled by Glencore International, the commodities trader that is one of the world's largest and most secretive private companies. What little is known about Glencore isn't pleasant. It was formed by the fugitive financer Marc Rich, now 70, who was mysteriously pardoned by Bill Clinton in the dying hours of his presidency.

Although no longer associated with Mr. Rich, Glencore is run by a gaggle of former Rich lieutenants, among them Willy Strothotte, who is chairman of Glencore and a director of Xstrata. The U.S. Central Intelligence Agency had exceedingly rude things to say about Glencore in the oil-for-food scandal, all of which are denied by Glencore. People who know Xstrata say Xstrata "suffers" from Glencore's reputation. That much is obvious.

Xstrata yesterday announced the purchase of 19.9 per cent of Falconbridge (the company recently formed by the recent merger of Noranda and Falconbridge) from Toronto's Brascan for about $2-billion, or $28 a share. The move was purely opportunistic. Brascan has been trying to unload its underperforming mining and smelting assets, first assembled in the early 1980s under the Jack Cockwell reign, for years.

It's an open secret Xstrata would have preferred Inco, which has bigger and more productive nickel reserves and conveniently lacks a controlling shareholder. But Xstrata fears hostile deals, especially after its bid for Australia's WMC Resources got trumped by BHP Billiton earlier this year. An Xstrata bid for Inco would probably have encouraged competing bids from BHP, Rio Tinto or Anglo American, the Big Three global mining groups. Better to have 19.9 per cent of the consolation prize than get involved in a takeover game you're likely to lose. Note that Inco shares fell yesterday with the deletion of one name -- Xstrata -- from the list of potential acquirers.

Xstrata boss Mick Davis made it clear owning all of Falconbridge was the possible next move, though not a certainty. "We don't intend to be a long-term investor with a minority interest in the company," he told Bloomberg News.

In all likelihood, Xstrata will not take the heat that China Minmetals took last autumn from a few politicians and some media, when it appeared all but certain it would buy Noranda (the deal fell apart). Too bad. If China Minmetals, which is controlled by a Communist government with an atrocious human rights records, deserved scrutiny, so do Xstrata and Glencore.

Glencore was created in the mid-1970s by Mr. Rich to trade metals, minerals, crude oil and, later, grain. In the 1980s, it bought interests in resource companies and today owns significant stakes in three public companies, among them Xstrata. Last year, Glencore had sales of $72-billion (U.S.) on assets of $23.5-billion. According to published reports, including a July investigation by BusinessWeek magazine, Mr. Rich was notorious for trading with Iran during the hostage crisis, South Africa during apartheid and Libya and Cuba during the U.S. trade embargoes.

In 1983, he was indicted by the U.S. Justice Department for racketeering, trading with the enemy (Iran) and tax evasion. He fled to Switzerland. His pardon by Mr. Clinton meant he was exempt from punishment from any criminal conviction. The pardon triggered investigations in both houses of Congress and fierce criticism from Democrats and Republicans. Investigators wanted to know whether Mr. Rich's ex-wife, Denise, who gave an estimated $1-million to various Democratic causes, including the Clinton library, could explain Mr. Clinton's bizarre behaviour.

Mr. Rich sold his interests in Glencore in 1994, amid rumours of a fight between him and his partners. His lawyers and Xstrata officials say he has no interests in either Glencore or Xstrata. But his legacy lives on. Three Xstrata directors have top positions at Glencore; they are all survivors from the Marc Rich era.

Glencore's -- and by extension Xstrata's -- problems didn't end with Mr. Rich's departure and presidential pardon a few years later. The Iraq oil-for-food scandal took care of that. Last year, a CIA report alleged Glencore paid $3.2-million in illegal surcharges to Iraq for Iraqi oil. Glencore denies any illegal or inappropriate dealing with the Iraqi government outside of the UN-administered oil-for-food program.

Xstrata's association with Glencore became an issue in Australia during the battle for WMC. Politicians and lobby groups said Xstrata's bid for WMC should have been blocked (the government ultimately said it could go ahead). Xstrata isn't buying control of Falconbridge. So far, it's just a passive investment. But the status quo is likely to change as the mining industry consolidates. Xstrata should at least explain how it and Glencore are truly independent from each other, as they claim they are.

ereguly@globeandmail.ca

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