Nyrstar - Reaching favourable settlement with Glencore

Yesterday, Nyrstar announced it has reached a settlement with Glencore in relation with the termination of the European leg of the commodity off-take agreement between both parties as well as the divestment of Glencore’s 7.79% stake in the company. Both elements were required for Glencore to get approval for its multi-billion merger with Xstrata.

Under the terms of the settlement, Nyrstar will cease to sell commodity grade zinc metal produced at its European smelters (we estimate about 350kt) to Glencore by 31 December 2013 in return for Glencore paying a termination fee of € 44.9m. Nyrstar will continue to supply Glencore with commodity grade zinc produced outside of the European Union (Clarksvill, Hobart and Port Pirie) as before under the commodity off-take agreement.

Nyrstar is currently evaluating all options to sell commodity grade zinc produced at its European smelters ranging from bringing the marketing and sales back in house to tendering this volume to third parties or partnering.

In addition, Nyrstar will acquire Glencore’s 7.79% shareholding in the Company for € 44.9m (€ 3.39 per share or 10% discount to the 5-day volume weighted average price). Nyrstar will hold the acquired shares as treasure stock and will look to place the shares with suitable investors over time.

As a reminder, Nyrstar and Glencore entered into the agreement in November 2008, commencing January 2009 with a term of five years. In June 2011, both parties agreed to extend the arrangement until the end of 2018. Under the agreement, Nyrstar is selling commodity grade zinc and lead metal to Glencore at LME prices plus market-based, annual agreed premiums. The off-take agreement allowed Nyrstar to direct its focus on zinc and lead alloys. The main benefits to Nyrstarfrom the agreement are prompt payments and lower inventories, resulting into lower working capital requirements.

Our view:
We regard the settlement reached with Glencore as favourable to Nyrstar:
We believe Nyrstar has negotiated a decent termination fee. If Nyrstar would take the sale and marketing in-house, it would result into a significant increase of its working capital requirements (we estimate by about € 60-80m). However, we note there is significant interest in the market from traders to take over the contract and Nyrstar also has enough time (31 December 2013) to work out a solution. By acquiring Glencore’s 7.79% equity stake in the company, Nyrstar has taken full control of the divestment process.