Rio Tinto's thermal coal operations in New South Wales (Photo: Rio Tinto)

Rio Tinto's thermal coal operations in New South Wales (Photo: Rio Tinto)

Days after Glencore closed its long-awaited takeover of Xstrata, a new company, X2 Resources, was registered in London. Within 18 months it had raised $5.6bn, with a further $8bn of debt reportedly available from
JP Morgan.
     X2's founder, Mick Davis, sold Xstrata to Glencore when copper was trading above $8,500 per tonne. It is now trading at $4,450. Yet Davis has stayed out of the market and rumours are flying.
     With just 10 employees and an office in St. James's in London, X2 has been linked to Rio's thermal coal business in New South Wales, BHP's Nickel West operation in Western Australia, the Zaldivar copper mine in Chile and the South African assets inside South32. But nearly 3 years after it was founded and X2 has not

invested a single dollar.
     Its money is “sitting idly in the bank”, according to The Globe & Mail. X2 was outbid for Zaldivar and is struggling “to clinch its first deal”, according to Reuters. “Mick Davis is definitely under a great deal of pressure.”
     Having deployed $35bn in
40-odd acquisitions as CEO of Xstrata, even pursuing Anglo American, Davis has supposedly gone gun-shy. Some analysts even question whether X2's funding has disappeared.
     Hong Kong-based trading group Noble, one of X2's key investors, has “run into financial difficulties”, writes South Africa's Business Day Live, “raising questions” about Davis' capital. TPG, another investor behind X2, has also jumped ship, according to one of the firm's competitors.

     Davis has remained silent. But what if all those assumptions are wrong? What if X2 has been deploying capital all along, quietly buying-up the high-yield debt of target companies?
     It would be a win-win manoeuvre. Copper miners from Freeport to First Quantum have seen their bond prices crushed to under 50 cents on the dollar. If metal prices recover, bonds will bounce back to par, as they approach their redemption dates; if prices continue to weaken,

..................................

MINING BONDS   price, yield, due

Anglo American......67c, 10%, 2023
Glencore......................78c, 11%, 2019
Fortescue...................84c, 14%, 2019
Teck Res...................52c, 15%, 2023
Freeport....................69c, 22%, 2018
HudBay Min............57c, 26%, 2020
First Quantum.........48c, 30%, 2020
Thomp' Creek.........14c, 135%, 2018
Peabody Energy......8c, 153%, 2018

bondholders will be first in line for the underlying assets. And in the meantime, investors can collect yields as high as 30 per cent.
     X2 declined to comment, but sources familiar with the company's thinking say that buying non-controlling interests is not within its thesis; many midtier copper producers, whose market caps have been crushed, could simply be bought outright. Rival private equity funds also point out that buying debt and sitting through bankruptcy proceedings is a long and convoluted process, which not all investors are willing to go through.
     But as distress mounts in the mining industry, debt, rather than equity, increasingly looks like an open back door, through which predators can gain access to almost any asset they like.

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