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Team or Enterprise Premium FT. Pay based on use. Does my organisation subscribe? Discover Membership. Editions Quartz. More from Quartz About Quartz. Follow Quartz. These are some of our most ambitious editorial projects. By Tim Fernholz Senior reporter. As markets panicked in the wake of the attack, coal prices collapsed, leaving investors with little appetite for the stock. Glasenberg pulled the listing. It was the start of a whirlwind expansion for both companies. But Davis, who had extensive experience in utilities and commodities, and had been the CFO of Billiton, another mining giant, was keenly aware that he could not simply run everything to please Glasenberg.
Xstrata was a public company as well, and now a very large one, with its own investors and their own concerns. The two former school chums soon found themselves at odds. Not publicly, but they were definitely angry. The rift deepened over time. Glasenberg was frustrated that Glencore was not getting more business from its little brother to market the commodities Xstrata dug from the ground. When Xstrata was approached with a takeover offer from Vale, he vetoed it because he could not get a similar commitment from the Brazilian miner to sell its wares through Glencore.
Glencore, which was coming under strains of its own, did not have enough cash available to take up its entitlement. As Xstrata increasingly went its own way, Glasenberg and Glencore found themselves at a crossroads.
One option was simply to up stumps: sell the one-third stake in Xstrata and focus on its own commodities-trading company. But Glasenberg saw an awful lot of value in taking full control of Xstrata. But in order to merge, Glencore would have to transform itself into a public company and expose itself to the intense scrutiny of the public markets.
Only by going public and creating a liquid equity base would Glencore have the currency to merge with Xstrata. For a company that had long operated in the shadows, that would be a change unlike any other. The bigger balance sheet gave Glencore the ability to trade bigger volumes, hold inventory for longer and expand its shipping operations. And the company was no longer focused on trading, the thing it knew how to do best.
It bought a commodity in one place and then shipped it to another part of the world where that commodity was selling for a higher price. The new combined entity, very briefly known as Glencore Xstrata, was much more exposed to the capital-intensive business of extracting those commodities out of the ground.
As a pure commodity trader, Glencore had always been nimble enough to quickly cut balance sheet when the need arose. But mining meant committing capital for years, if not decades. It had become less agile at precisely the moment it needed agility the most. It made no sense. The negatives associated with the merger became clear almost immediately.
As commodities softened in the ensuing years, the pain deepened. With those kinds of woeful results, the market started betting heavily against the company. With an ocean of debt, declining revenues, repeated writedowns and a balance sheet that seemed to be out of control, Glencore looked vulnerable - and the short-sellers began to smell blood. Silver Wheaton made its money through long-term deals on silver streams, and the Peruvian operation looked ideal. Each time the answer was no.
So no one was more surprised than he when the phone rang one day and it was Glencore on the line, looking to make a deal.
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