In a skyscraper on Madison Avenue in New York, with views over Central Park and a walkway into Trump Tower, few bankers have a better record than Michael Klein.
From Heinz to Dow Chemical, Qatar’s prime minister to the Crown Prince of Saudi Arabia, Klein has an “unmatched” book of clients, say his former bosses at Citi. Advising Glencore on its $90bn merger with Xstrata and Barrick Gold’s chairman John Thornton on its $18bn takeover of Randgold last year, the world’s largest mining companies bring him their largest deals. Having launched his own shop in 2008, Klein is already rivalling BMO, Rothschild and CIBC as the most aggressive M&A outfit in the mining sector.
Two hours by plane to the north, there is another deal on his horizon: consolidating Canada’s Sudbury basin, a 60km repository of nickel, copper and cobalt, formed when an asteroid smashed into the earth 1.8bn years ago. With 16 mines and mills split between Glencore and Brazil-based Vale, Sudbury produces $2bn of nickel a year, more than half of Canada’s total, putting it ahead of Russia and Australia as one of the world’s largest producers. Continuing decades of on-off talks, both sides have explored a merger. Canadian nickel giant Inco was due to buy rival Falconbridge for $11bn in 2006, but the deal was broken-up when Xstrata tabled a $19bn cash bid, leaving Vale to buy-up the remainder.
13 years on, the industrial logic is as compelling as ever. Whilst Vale is facing a 50bn reais ($12bn) cleanup bill after a dam burst in Brazil, Glencore is battling mine invasions and industrial accidents in the D.R.C. and Zambia and a corruption probe by Washington’s Department of Justice. Its Canadian nickel business, led by former copper trader Kenny Ives, a level-headed golfer in his 40s, has in contrast been a placid, all-weather earner.
Investors support the rationale behind a Sudbury deal, whilst Glencore’s CEO Ivan Glasenberg has no plans to wait out the Department of Justice before continuing with M&A, recently backing a refinery in Ontario owned by First Cobalt. Bankers see immediate savings of at least $550m from bringing Sudbury together, worth $6.4bn over the next 16 years of production.
Inside a green glass building in Ontario, technicians are tracking data from nickel mines across the planet. Using X-rays and fuzzy logic, spewing-out graphs on particle size and porosity, the lab is the world leader in nickel mining technology, wading through technical papers for 250 projects a year, from Russia to Panama.
Known as XPS, the lab is led by Domenic Fragomeni, a troubleshooting engineer who makes quips about performance incentives: pay archaeologists for every piece they surface and priceless pottery gets broken.
Originally a research division, XPS was founded in the 1970s: having demolished a faulty control room, Falconbridge was determined to improve its technical insight. Using “metallurgical surveillance”, it drops software into processing plants, generating real-time data, following valve performance and flow rates from South Africa to the South Pacific. Canada’s largest mining companies, including Ivanhoe, HudBay and Lundin Mining, all rely on its technology; when companies bring in mining adviser Hatch, Hatch brings in XPS.
One of the lab’s clients is Vale. It also works for Glencore, though the relationship is less straightforward. Legally, XPS is a standalone company, but it is 100 per cent owned by Glencore, which pegs its budget at zero each year, instead paying for technical advice.
“Lean” with “positive cash flow”, it is a self-funding testbed for new technologies, say former insiders. “I had this mindset that engineering firms just did this stuff better than mining companies,” says the former head of Glencore’s tech division. “Once I spent time there, I found a team that was incredibly skilled, very small, but they had these great assets.”
With interlocking mines in Sudbury, passing trucks and teams of staff who have worked for both operations, Vale and Glencore know each other’s assets intimately. Both sides came close to a deal in 2013, but talks were “very slow and very difficult”, Ivan Glasenberg has said. Vale’s negotiating team was led by Eduardo Bartolomeo, a logistics specialist from the beer and steel industry who recently closed a furnace in Sudbury, cutting Vale’s costs and emissions. Having previously led copper and nickel, advised by banks in Toronto, Bartolomeo is now group CEO. Nickel is a “predictable” source of cash flow, he told investors in Miami this year.
Whilst Vale has been laying off workers, lowering production by a third, many of Glencore’s largest capital commitments are not in the Cape or the Congo but Canada, where its technicians are building a new gas plant and a $700m all-electric underground mine, pushing its output in Sudbury “well into the 2030s”, executives tell Northern Ontario Business.
XPS has another project on the drawing board: biomining. For every tonne of nickel shipped out of Sudbury, at least 19 tonnes of waste has been piled-up in dumps, filling lakes with sulphur and slurry. By training bacteria to eat the material, XPS thinks it could liberate residual nickel, producing barrels of saleable sulphur and $6bn of iron ore byproduct.
With grades of 0.8 per cent, combining Vale and Glencore’s operations would create a 1m-tonne nickel stockpile, worth $15bn at current market prices. Bankers liken the technology to chefs in New York cooking sous vide, using low temperatures to slowly roast herbs and joints of beef. Turning waste dumps into cash flow and battery metals, the same technology has been used to clean-up oil spills and purify water. Once a polluted moonscape used by NASA for training astronauts, Sudbury could become the global leader in green mining technology.
Buying-out Vale would not only boost Glencore’s battery metal business, but dilute its exposure to Africa. Glasenberg has pledged to cap its coal production, funnelling coal earnings of $1bn to $2bn per quarter into green energy. With few copper assets available, nickel is high on Glencore’s agenda.
Shipping could also streamlined. Vale currently ships its nickel to a refinery in Wales, trucking it across the UK, loading it onto boats for buyers, but Glencore ships to a refinery in Norway with more than double the capacity. Its trading desks in Switzerland expect nickel to shoot up this year, one of the chief beneficiaries of new battery technology being pushed by Tesla, Panasonic and Sony. Lower prices might make it easier to nudge governments and unions into backing a deal, but previous attempts to consolidate Sudbury have been waved through by regulators.
Yet an agreement could remain as elusive as ever. Glencore’s business structure is flat and fluid, say bankers who advise the company. Sources who have sat across the table from Vale in Brazil say it is intransigent and bureaucratic, blocking deals. Whilst Glencore has higher grades and better technology, Vale is the biggest employer in Sudbury, with larger reserves and deeper stockpiles, meaning both sides can wait out the other. “We know how to unlock the vault,” XPS says, “but we don’t have to open it right now.”