Focus: Mick the manic miner

He is in the middle of a hostile £3.3 billion bid for Australia’s WMC Resources, one of the world’s biggest producers of uranium. Last Friday he extended the offer period to March 24. It is his second hostile bid for an Australian miner in as many years.

A lot is still riding on this planned takeover, which is to be funded by a $7 billion facility from Xstrata’s financial adviser JP Morgan. Davis could yet face a counter-bid from BHP Billiton or Rio Tinto and still has to persuade a number of big WMC investors to support his offer, which has already been increased once.

If he fails he has a contingency plan to hand back $1 billion to his investors. But if he succeeds he will move one step closer to building a global diversified mining giant on the scale of BHP, Rio and Anglo American, a feat achieved from a standing start. A share re-rating would push Xstrata into the FTSE 100’s top quartile.

Mining analysts at Morgan Stanley believe a combination of Xstrata and WMC could push the share price to 1,200p from its current 1,052p.

“WMC can provide Xstrata with the lift in asset quality and diversity to be closer to its UK diversified peers,” they say.

Colleagues of Davis do not underestimate his ambition. One said: “He is young, he has the knowledge and the energy. He may have been assisted by the commodities boom, but that is what business is all about — it’s a case of Who Dares Wins.”

But if the commodity cycle turns, his highly leveraged bet will leave him exposed and he will have to act sharply to close inefficient mines and cut costs. If he is forced to take this action one colleague said: “He would make Genghis Khan look like a kindergarten teacher.”

TO understand what drives Davis, it is necessary to go back to the start of his career. He began at Eskom, the South African electricity utility, where he was headhunted by Gencor, the mining group later subsumed by Billiton. He became finance director, working closely with Brian Gilbertson.

The duo drove rapid growth at the group and it was Davis who persuaded the board to list in London. Ian Hannam of JP Morgan said: “There are four people who claim they brought Billiton to London— Gilbertson, myself, Adrian Coates (head of the metals and mining group 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.”

Davis moved his family to London, buying a beautiful house near Hampstead Heath. It was a big financial stretch: at this stage, despite his success, he had not made the big money.

Those early days were heady times for Gilbertson and Davis, who quickly used Billiton’s London listing to finance a succession of deals at a time when commodities were cheap. But it was not to last. When Billiton merged with BHP, Davis ducked out. As part of the merger, it was promised the chief executive’s job would be in Australia and the finance post in London. But at the last moment the finance job was also moved Down Under and Davis was not prepared to decamp his family again.

He then received a phone call from Ivan Glasenberg, chief executive of a highly secretive Swiss-based partnership called Glencore International, one of the world’s biggest commodity traders. It owned a 40% stake in a troubled listed mining company called Xstrata which had a market value of $500m and was close to breaching covenants.

Davis has said in the past: “It was such a small company with apparently so few prospects that it seemed to me such a great challenge.” It also presented an opportunity to get in on the ground floor and make some real money. It was just after September 11, 2001 and commodity prices were on the floor. Weeks after he joined, Glencore was forced to abort the flotation of its coal company, Enex. Davis persuaded Glencore to sell it to Xstrata and within four months he had moved the listing to London and, armed with $1.8 billion in debt and $1.5 billion from a cash call, he bought Enex. He moved the listing to London but kept the company’s tax residence at Zug in Switzerland.

Since he joined, Glencore’s partners have had many reasons to thank Davis. He has created some $4 billion of value for them; Willy Strothotte, Glencore’s chairman, is also chairman of Xstrata.

Davis has not looked back either. Last year he took home $3.3m and in options he has made about £15m. Equally important for Davis, he is his own man. John Meyer, an analyst at Numis Securities, said: “Xstrata is like Billiton was a few years ago, only this time Davis is showing how it can be done without Gilbertson.”

Davis is a man who divides opinion. He does not suffer fools gladly. Charles Kernot, a mining analyst at Seymour Pierce, said: “In public he has put down a lot of people that have asked stupid questions.” He is also disdainful of many investment banks, which he says are “marketing machines rather than solution providers”.

But Davis, a large, burly man, has a caring side. When two mineworkers died in South Africa after a roof caved in, he broke off a holiday and flew to the country to be nearby. And when a banker at Deutsche Bank accidentally e-mailed a highly sensitive document, Davis stood up for the man when the bank tried to fire him.

He inspires huge loyalty from his team, who respect his intellectual honesty. Throughout the journey at Xstrata he has had Trevor Reid, his fin-ance man and a former colleague whom he recruited from South Africa’s Standard Bank, and his investor relations man Mark Gonsalves, a former Roman Catholic priest. He has also retained key directors from companies he has taken over.

Bankers say Davis, a professor of accounting, is a numbers man who has introduced a private-equity style discipline. The global operation has only 30 people at head office.

He has a reputation for stripping out costs. When he took over Australia’s copper producer MIM (again backed by

JP Morgan and Deutsche Bank) for $4.9 billion in 2003, he quickly made huge savings. MIM’s Brisbane office was staffed by 400 people, now it has 35. So far some $60m of annual savings — described as low-hanging fruit — have been taken out. Now operational costs are being squeezed and when the group reports in two weeks, the savings figure will have increased sharply.

BUT why is Davis now risking it all again? Commodity prices are at the top of the cycle yet he is betting more than £3 billion that he can repeat his success with WMC.

The answer is threefold. Davis believes the transformational impact of the deal and the potential synergies of the Australian operations outweigh the risks. Second, Xstrata can afford it. At the end of December its debt-to- equity ratio was below 20%. Its borrowings stood at $1.4 billion. Without the WMC deal this could be paid off within 18 months.

Third, Xstrata’s critics say that unlike its larger peers it has no shining jewel. What WMC brings is Olympic Dam, a prized and valuable copper- uranium operation and an entry into the nickel market.

Gonsalves says the group’s Swiss tax status makes deals — even at the price it plans to pay for WMC — more financially viable: “On any acquisition that we do, the tax savings translate to 10% of (the target’s) net present value. In the case of MIM it was something like $18m a year.”

Reid said: “We have offered a full price and have not as-sumed that commodity prices are going to stay at their current levels, but what WMC does is massively enhance our portfolio and push us up the size-and-quality ladder.”

In Australia, Davis has been painted as an interloper picking off choice assets and has many detractors at state and federal level. His reputation was not helped when he closed MIM’s Windimurra vanadium mine in Western Australia, which had been built with more than $30m in state infrastructure support.

Bankers in Australia and London remain convinced a rival bid will emerge. WMC’s share price still stands at A$7.69, a premium to Xstrata’s revised offer of A$7.20, though the signals being given by Rio and BHP suggest they may not have the appetite.

One banker said: “There is a real belief that Australia Inc will encourage BHP to bid and preserve this asset in Australian hands.” But BHP has its own pipeline of 10 big projects, starting with an iron ore mine in Western Australia to feed the booming Chinese economy, and uranium assets do not appear to be on its radar screen.

If Davis bags his target, he knows the hard work will have to follow quickly to achieve the required savings. Many of his friends say, at his young age it will be interesting to see what he does next. He has remained close to South African politics and that could be his next challenge. But for the present the world mining stage is keeping Big Mick running at full pelt.

FEARS OF PAIN TO COME

BOOMING commodity prices are good news for the likes of Mick Davis, but threaten bad news for British consumers, writes Dominic O’Connell. Some industrialists believe it is only a matter of time before higher input prices for manufacturers filter through to the high street — oil, steel, iron ore, coal, gas, electricity and other industrial staples have more than doubled in price in the past year.

The Bank of England, which has the job of keeping UK inflation at 2%, sounded a cautious warning in its inflation report last week, noting “supply chain pressures” could drive up inflation, and that factory gate prices were on the rise.

UK manufacturers are feeling the pinch. Hadley Group, Britain’s biggest steel-products manufacturer, last year saw the price it pays for galvanised and rolled steel increase by 50% and 70%, respectively. Hadley, which makes a range of construc- tion products, including roofing, security doors and security fencing, was in the fortunate position of being able to pass on the increases.

‘In the past it has been a few percent here and there, and customers might expect you to take the cost yourself. But with rises like last year, that was not an option,’ said Phil Hadley, chairman and managing director.

Hadley, who is also president of the Confederation of British Metalworking, points out that not all manufacturers are in such a fortunate position. Hadley was able to pass on prices because it offered security of supply and because of the

bespoke nature of its work. ‘But there are companies out there, working for example for car companies, that had to commit to one-year supply contracts, and have had to take all the pain,’ he said.

John Fleming, president of Ford of Europe, said there had been ‘enormous pressure’ on the industry and its suppliers. But passing on raw material cost increases was not a realistic alternative, he said.

‘We haven’t done that because competition is so fierce, and it is fuelled by huge overcapacity in car manufacturing,’ said Fleming. Ford had attempted to keep down costs by signing long-term deals with steel suppliers and negotiating with component makers.

But economists said it would be some time before the war being fought by Britain’s industrialists was felt on the high street. Consumers are still shielded by cheap imports from low-wage economies that are flooding in and pushing prices down.

And the importance of manufacturing to the British economy has dwindled. Services have taken over. According to the Blue Book, the bible of the British economy, manufacturing had by 2002 shrunk to account for only £150 billion of the UK’s roughly £1,000 billion gross domestic product — in other words, manufacturing now accounts for about one-seventh of the country’s wealth. In the last quarter of 2004, the British economy grew by 0.7%, while manufacturing ’s output shrank by 0.5%, and service industries grew by 1%.