Mick Davis, the former chief executive of Xstrata, has lost no time getting back into the corporate swim following the takeover of the mining group by its biggest investor Glencore in May.
Davis and chief financial officer Trevor Reid have assembled $1 billion of finance to make mining acquisitions from the Hong Kong-based trading house Noble Group (a Glencore competitor) and the private equity house Texas Pacific Group (TPG).
The intention is to create a mid-sized diversified mining and metals group to be known as X2 Resources that will use Noble as its marketing arm in much the same way as Swiss-based Glencore was deployed in the past.
Davis’s return to the fray, at a time when valuations of mining assets have fallen sharply, has attracted widespread attention. His main expertise at Xstrata was in coal but demand has been slipping because of the emergence of shale gas.
City analysts suggest his new enterprise may focus on iron ore and zinc assets.
In his previous role at Xstrata Davis ran his empire from a tight headquarters giving autonomy to the company’s far flung offshoots. This is also a model associated with the legendary investor Warren Buffett.
It was largely deployed by Davis before the $44.6 billion merger with Swiss-based commodity and natural resources group Glencore.
The potential risk of too much regional autonomy recently has been recognised by Britain’s biggest bank HSBC when it emerged that its Mexican operations had been abused by drug cartels for money laundering and its Middle East branches suborned by radical groups including al Qaeda.
Under the current HSBC chief executive Stuart Gulliver the bank is centralising the command and control of the business at its two main headquarters in Hong Kong for Asia and London for the rest of the world. Every aspect of the business from risk-control, to compliance and communications is being organised under a single umbrella.
Similar centralisation has taken place at GlencoreXstrata following the merger that saw Ivan Glasenberg (who attended the South African Theodor Herzl School with Davis) taking on the role of chief executive of the combined enterprise.
Glasenberg’s goal has been to show that the deal, which preceded the departure of Davis, was worth doing amid a sharp fall in the share price of the combined group.
At briefings for analysts and journalists Glasenberg lately outlined the actions he had been taking to streamline the business with the goal of saving at least $2 billion a year by the end of 2014 largely by abandoning the regional offices and structures that were part of the Xstrata model and centralising certain functions. But the key employees on the ground would be kept in place.
The combined group has been divided into three main divisions: mining and metals, energy and agriculture. Glasenberg has adopted the Glencore business model which he describes as “responsibility in lieu of bureaucracy and titles”.
In its briefing documents Glenstrata, as it is now known in the City, emphasises the importance of “centralisation of functions” to improve effectiveness. That can be a brutal business. As of September 2013 Glencore reported it had already rationalised corporate and divisional headquarters resulting in a reduction of 45 per cent of its head office staff and 2000 employees.
More than 30 offices have been closed.
The hoped for synergies of $2 billion arise from three areas of change. Marketing of coal, copper and zinc, is being rationalised through savings on transport and contract pricing targeting savings of $450 million.
Cheaper financing will produce a further $ 175 million of economies and cost reductions will add up to $1.38 million.
With his swift return to the corporate scene, Davis seems to be replicating the Xstrata model. Last time around the track Davis smartly hit the super-cycle in commodities when prices went up tenfold on the back of China’s manufacturing and industrial revolution.
No one expects that kind of exponential rise in natural resource prices to happen again. Nevertheless, the timing of his new project looks propitious in that commodity prices have fallen back and the biggest mining players, having over-invested in the good times, have surplus assets that they may seek to discard.
Davis looked to have lost out to Glasenberg in the aftermath of the Glencore takeover. However, the speed with which he has been able to put together a new enterprise, with a prestige advisory team that includes Goldman Sachs, indicates that the financial community still retains great faith in the formidable skills of “Mick the Miner”.