Time is ripe for a Rio Tinto, Glencore merger

NOW we know why Glencore CEO Gary Nagle refrained from restructuring the company last year. Instead of spinning out coal or selling the group’s trading business, which was one scenario the market envisaged ahead of a capital markets day in December, Glencore unveiled $24bn in copper projects — a narrative that plays to a merger with Rio Tinto, which was already under discussion.The talks were confirmed on January 8 after the news was leaked to the Financial Times. In essence, the sides propose a merger effected through Rio making an offer for Glencore. In terms of takeover regulations, Rio Tinto has until February 5 to formalise such an offer.Rio Tinto’s rationale for doing the deal is that in acquiring Glencore it would double production of copper to about 1.7 million tons a year, rising to 2Mt annually by 2030. Glencore has projects that extend beyond 2030, many of which are relatively low in capital intensity. Rio Tinto has less new copper production in that timeframe. Resolution, a project in the US, is not due until 2035 at the earliest. Rio has the technical capability to execute Glencore’s projects. Glencore offers Rio Tinto a high-value node in Chile and Argentina.For Glencore, a merger creates a $210bn company with the scale that Nagle said the diversified sector needs to remain relevant to investors, especially as mining becomes less a specialised interest. “A clear global leader on scale,” said Ian Rossouw, an analyst for Barclays, with top five producer status in iron ore, copper, coal, aluminium, lithium and nickel.What, though, are the chances of a combination between the two companies being a success? While this is not the first time Glencore and Rio Tinto have contemplated a merger — there were discussions in 2024 and 2013 — this time feels different. Previously, talks foundered on the difference in corporate culture.Now, however, there is evidence of political will, as evidenced by Rio Tinto last year parting prematurely with its former CEO Jakob Stausholm, who was against a tie-up with Glencore (on corporate culture grounds). “Following his departure last year, we believe the potential for a successful tie-up has increased significantly,” said Rossouw.As for the market, much will depend on the detail. Chinalco, which is a 14.5% shareholder in Rio Tinto and came out against a tie-up in 2013 (when it owned a lesser stake), favours the deal, according to reports. The response elsewhere has been mixed. Scepticism is rife in Australia. Rio Tinto shares shed 8% in the aftermath of the announcement that merger talks with Glencore were under way.Shares in Rio Tinto have partially recovered, but investors in general remain suspicious of mergers & acquisitions (M&A) in solving mining’s problems of scale. “A lot of M&A at the top of the market hasn’t created value in the long term,” Mark Freeman, MD of Australian Foundation Investment Company, one of the country’s oldest and largest investors, was quoted by Reuters as saying. ”So we’re certainly curious to understand why they think this time it would be different.”One worry is that Rio Tinto will overpay. Investors remember BHP’s merger with Billiton in 2001, described by an analyst as “an absolute heist”. John Ayoub, a portfolio manager at Wilson Asset Management, told Reuters: “No premium can be paid whatsoever.”Australian investors also don’t like the presence of coal in Glencore’s portfolio. They also question why Rio Tinto needs a merger, especially as the group’s new CEO, Simon Trott, recently announced plans for $5bn-$10bn in noncore asset divestments and up to $650m in annual cost savings from the first quarter. In Glencore, by contrast, Rio Tinto is taking on a company that operates in over 30 countries and handles or markets over 60 commodities. “It’s just a bit of a U-turn strategy,” said Atlas Funds Management chief investment officer Hugh Dive.Yet Australian investors comprise only 23% of Rio Tinto’s total share register. The majority of investors hold their shares in London-listed Rio Tinto (UK) in terms of Rio Tinto’s dual-listed structure, which goes back to its merger with CRA in 2015.King copperRio Tinto will almost certainly point to changing times. In a world of increasing complexity, where securing critical minerals such as copper has become mixed with intense and sometimes dangerous geopolitical conflict, capitalising on the most in-demand metal is the single biggest deliverable for the diversifieds. The world is not 2013; it’s not even 2024, given the pace of political developments globally.“Copper equities have decoupled from diversified miners as investors seek simpler, copper-heavy commodity mixes,” said Matt Greene, an analyst for Goldman Sachs. “Scarcity premiums, operational delivery and ongoing supply tightness are supporting the rerate,” he added.An S&P Global report this year concluded that the “accelerating pace of electrification” is projected to swell copper demand to 42Mt by 2040 — a 50% increase from current levels. Yet, existing supply is poised to decrease in coming years as the mining sector faces challenges across the copper value chain.In fact, global copper production will peak in 2030 at 33Mt. “Unless significant adjustments are made, the widening disconnect will result in a supply deficit of 10Mt by 2040 — 25% below projected demand,” it said.Interestingly, refined copper production has been in surplus. That, though, is also changing. “We forecast 2026 copper demand growth of about 3% vs refined supply growth of about 1%, resulting in a 300,000t-400,000t deficit that lifts to about 500,000t in 2027,” it said.Of course, it is the details that will matter. To construct a “merger of equals” — which was Anglo American’s elegant and much-lauded approach in merging with Canada’s Teck Resources — will require major surgery, potentially a carve-out of Glencore’s assets prior to a tie-up.In this regard, the “ultimate plan” could involve the formation of a major bulks company consisting of Rio Tinto’s iron ore assets together with Glencore’s coal assets listed in Australia and a base metals vehicle listed in London, said Deutsche Bank in its appraisal of the discussions. “If so, a merger of equals-type structure/price could be more likely,” it added.Glencore may also have to restructure its marketing division, involving a consolidation of some assets and the sale of others, to satisfy any antitrust concerns, though not many issues exist in this respect, analysts saidThen there is Rio Tinto’s dual-listed structure — in which the Plc trades at a discount to Rio Tinto Ltd in Australia. That creates complexities (as well as opportunities). Rio Tinto would probably want to deal in its best-rated paper, the Ltd line of paper, and address the disparity between the Plc and Ltd lines. But Australian investors may grumble at the implied dilution. M&A of this scale is never easy, and often does not pass go. Rio Tinto and Glencore will be hoping to convince investors to back-pocket their short-term concerns.A version of this article first appeared in the Financial Mail.The post Time is ripe (finally) for a Rio Tinto, Glencore merger appeared first on Miningmx.Weiter zum vollständigen Artikel bei Mining.com Weiter zum vollständigen Artikel bei Mining.com