JOHANNESBURG – Anglo American suitor Xstrata on Wednesday published an open letter in which it set out its rationale for an all-share merger of equals that bore none of the usual characteristics of shareholder premiums and worker retrenchments.

Mining analyst John Meyer of Fairfax said simultaneously that the merger offered an acceleration of efficiency gains for Anglo and Standard Life Investments head David Cumming urged Anglo to hold talks on the plan rather than reject it out of hand.

Xstrata said that there would be no South African retrenchments and that South Africa would be a net beneficiary of the transaction, which it described as a merger of two equally-sized companies from which equally-sized shareholder benefits would accrue.

The London-listed company said that the board of directors and management team of the combined entity would be sourced from both companies.

The strategic rationale was having contiguous or proximate assets in Australia, South Africa and South America; shared ownership of Collahuasi copper and Cerrejón coal operations; broad geographical distribution of operations and projects; complementary portfolios of commodities; and an ability to optimise each company’s significant portfolios of organic growth.

“It’s well recognised that the combination of Xstrata and Anglo is a natural fit,” Xstrata CEO Mick Davis commented.

Xstrata said that pretax synergies would be more than $1-billion a year by the third full year following completion of the proposed merger with no South African work force retrenchments.

In addition to those core synergies, Xstrata had identified further longer-term, tax, financial and project synergies, which both sets of shareholders would share equally.

The merger represented no dilution in value to Anglo shareholders from a savings point of view and synergies quantified were in addition to any savings under Anglo’s own initiatives.

Xstrata’s operational management had achieved best-in-class cost performance, delivering year-on-year average real cost savings of 1% a year from 2003 to 2008, compared to an average real cost increase at its FTSE100 mining sector peers of 2% a year over the same time period.

A combined management team would more rapidly and effectively realise sustainable reductions in operating costs across the combined portfolio.

A further uplift in returns would be delivered through the combination and prioritisation of Xstrata’s and Anglo’s project pipelines.

Xstrata said it had built a portfolio of assets which generated similar earnings to the Anglo American portfolio and which enjoyed a similar reserve-resource life.

The combined group’s enhanced diversification and cash generative base metals and coal portfolio would provide greater support for the platinum and diamonds businesses, which were currently failing to generate significant earnings and which might well require capital injection at a time of fundamental weakness.

Xstrata shareholders would take on greater emerging country exposure, while Anglo shareholders would benefit from increased diversification with equal contributions to the combined group’s earnings from Africa, South America and Australia.

The combined group would benefit from enhanced access to capital and improved financial flexibility to resume dividend payments and support further growth while maintaining an investment grade rating.

“The substantial synergies we have delivered in previous transactions have not come from redundancies at the operations but rather from improved productivity and efficiencies from economies of scale. In general, Xstrata’s approach has been to augment our operations’ capacity by putting management and resources back at the operational level, almost universally leading to improved safety performance and operational efficiency,” Davis added.

Xstrata said that it would continue to seek to engage with Anglo’s board and management to investigate the value that would accrue from such a combination.

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