DEALTALK-Glencore may seek partner to buy back coal mines

(For more Reuters DEALTALKs, click on [DEALTALK/])

* Determined to exercise option for Prodeco operations

* May seek partner as faces $2.5 bln option cost

* Glencore has higher working capital requirements

* S&P says buy back would not affect credit rating

By Eric Onstad

LONDON, Jan 28 (Reuters) - Commodity trader Glencore [GLEN.UL] is determined to buy back the prized Prodeco coal operations in Colombia from mining group Xstrata (XTA.L), but may chose to bring in a partner to do so.

Swiss-based Glencore was forced to give up the Prodeco operations last year when it was short of cash, but it has an option to repurchase them which expires in coming weeks -- an option which sources close to the situation say Glencore is keen to exercise.

Yet a need to avoid undue pressure on its balance sheet may lead the group to sacrifice a share of the spoils, opening an opportunity for someone else keen to get involved in the high-grade, low-cost operations that include two open pit mines, port facilities and part ownership of a railway in the South American country.

After a rebound in commodity prices, Glencore could manage by itself to pay the $2.5 billion required without a credit ratings downgrade, but it may prefer to spread the risk.

Sources said the company was considering a range of options regarding Prodeco and was taking into consideration its higher working capital requirements.

Glencore, Xstrata's biggest shareholder with a 35 percent stake, must decide quickly since it holds a call option for Prodeco that expires on March 3.

"I would say that a JV (joint venture) is more likely. If anything the credit crisis has made them, and the mining sector as a whole, a bit more conservative than they used to be and they are keen to maintain a liquidity cushion," said Henri Alexaline, senior credit analyst at BNP Paribas.

"You could see a financial sponsor or you could see a hard asset company, both of them would make sense."

He did not name any companies that might be interested.

HEATED DISCUSSIONS

Glencore agreed to sell Prodeco last year to pay for its share of a $5.9 billion rights issue by Xstrata since it did not have enough cash.

It got an option to buy Prodeco back within a year for $2.25 billion plus any capital spent by Xstrata on the mines, estimated at around $300 million. [ID:nLT603843]

During heated discussions leading up to the sale, Glencore insisted Prodeco was worth around $4 billion, mainly due to the value of inferred resources that could be developed in the future, one of the sources said.

Last month, Glencore improved its cash situation after raising $2.2 billion by selling convertible bonds that brought the private firm closer to a public listing. [ID:nLDE5BM0K6]

But rising commodity prices also meant rising requirements for working capital, since as a trading firm Glencore now had higher amounts of receivables and inventory to finance on its balance sheet, said one of the sources.

The company was chastened during the downturn when it faced high debts and tightened liquidity. In December 2008, Standard & Poor's downgraded Glencore's credit ratings and in March last year Moody's changed its outlook to negative.

In a report this month, however, S&P maintained its "stable" outlook and said Glencore would be expected to keep its current credit ratings even if it bought back the whole of Prodeco by itself.

COMMODITY OUTLOOK

"The company is likely to be evaluating a number of options, whether it's an outright repurchase or whether it's some kind of joint venture or a combination with a third party," said Alex Herbert, credit analyst with S&P.

"Clearly there is some uncertainty around the Prodeco transaction. There has been some additional financial flexibility within the rating because of the upswing in commodity prices and the convertible bond issue in December, but that would decline if they paid for the whole call option for Prodeco."

Glencore may also be wary of the outlook for commodity prices, which have faltered recently on worries about the impact on metals demand from tightening of credit in China, the world's biggest consumer of copper and iron ore.

"We also see risk about the broader commodity price environment. We do see some downside risk on the prices depending on the sustainability of the global economic recovery," Herbert said.

Copper prices MCU3 more than doubled last year, but have shed nearly 10 percent from their peak earlier this month.

While finding a partner would help cut Glencore's cash outlay, it would also have to hammer out an agreement on valuation, operations and the ownership structure. Perhaps more significantly, it would have to compromise on a past preference to keep full control of its operations. (Editing by David Holmes)