1 day Ago By Javier Blas
With the benefit of hindsight, it’s clear who got the better deal in the mining industry’s largest deals to date. Time – and iron ore prices – proved that Billiton needed BHP more than vice versa in their $US57 billion tie-up in 2001. Time and aluminium values showed Rio Tinto needed Alcan a lot less than the other way around in their $US38 billion deal in 2007.
The historical lessons are important as two of the sectors top players, Rio Tinto and Glencore, debate a merger. Loath to compromise: Would Ivan Glasenberg, Glencore’s biggest investor, make concessions to reach a deal? Credit: Bloomberg Obviously, who has the most to gain is far less clear when a deal is revealed — let alone in the heat of negotiations. Everyone likes to talk about mergers of “equals” and “win-win” acquisitions.
It’s typically nonsense. Gauging who’s leaving money on the table demands assumptions that are years, if not decades, in advance about commodity prices, geopolitical risks and investor appetite. At best, it’s art rather science; at worst, it’s based on gut feelings.
Looking at the potential merger of Rio Tinto and Glencore — “GlenTinto,” as some bankers have dubbed it – my gut says that Glencore, which is worth about $US55 billion ($89 billion) plus debt, needs the deal more than its rival, which is worth $US100 billion. So if either side needs to compromise on valuation to get a transaction done, it’s Glencore that needs to make sacrifices now to secure a better future. Good luck with that.
Glencore’s largest shareholder is the company’s former boss, Ivan Glasenberg – a South African who’s loath to compromise. Under his stewardship, the firm, which mixes mining with a huge trading business, sold shares to the public in 2011 at £5.30 per share.
Since then, out of about 3,460 days trading on the London Stock Exchange, the stock has spent just 71 days above its initial public offering price. Nevertheless, Glencore executives have a reputation of being among the smartest guys in the room, which will make Rio board members wary that whatever terms are offered, they’ll come off second best. That’s a shame; the combination would create a business worth more than the sum of its current parts.
Jakob Stausholm and Gary Nagle, chief executive officers of Rio and Glencore respectively, held abortive merger talks last year in October and November. Both companies are mum about what comes next, but the body language suggests talks can re-start. Rio, which dismissed previous overtures from Glencore, appears far more receptive this time.
And by engaging in the discussion, Glencore has hung a “for sale” sign above its door. The industrial logic focuses on three commodities, two distinct to each company, while the third is shared. Let’s start with iron ore.
Rio Tinto digs more of the commodity used to make steel than anyone else barring Brazil’s Vale. It’s a cash cow, generating profit margins in excess of 65 per cent and contributing 70 per cent of Rio’s underlying earnings. Rio makes most of its money with iron ore.
But the golden days of iron ore are over. Credit: Bloomberg But the golden days of iron ore are over; during the next few years, prices are set to drop as the company brings a huge new low-cost mine in west Africa into production, and Chinese demand for steel peaks. The engine behind Rio’s super-profits could sputter, providing a key motivation to engage with Glencore.
Better to merge and diversify before the reliance on iron ore becomes a drag on profitability. Then there’s coal. Glencore mines more of the fossil fuel than anyone else among international miners, and is also the world’s largest coal trader.
But Glencore also knows that the golden age of coal is behind it, and prices probably will continue to drop from the sky-high levels of 2022-2023. China will still consume lots of coal, but it will flood its domestic market to keep prices depressed. Coal contributes 40 per cent of Glencore’s underlying profit in mining.
But it’s also a magnet for shareholder dissatisfaction. Even in the era of US President Donald Trump, I don’t expect that to change, meaning that Glencore will continue to trade at a discount. The only way to address that is to spin off coal — but it’s too important for Glencore’s cashflow.
Put simply, the company would be too weak, particularly during an economic downturn, without it. If Glencore marries Rio Tinto, the resulting entity could sell the coal division, re-rating the remaining business. Finally, there’s copper.
Glencore already has a mighty business, but its growth potential is limited unless it’s willing to spend billions to build mines from scratch – something the company has been reluctant to do. Rio Tinto, on the other hand, has a small copper unit, but it has growth ahead. Combine the two, and it would probably create the best copper business in the industry, not just now but also in the future.
The timing is perfect – copper is the most important metal for the energy transition, essential in anything electrical. My conclusion is that the two behemoths should find a way to merge. But whether logic can persuade Stausholm and Nagle to compromise, with the Glencore chief – and Glasenberg – having to concede a weaker hand to get a deal done, remains to be seen.
Javier Blas is a Bloomberg opinion columnist covering energy and commodities. He is co-author of The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources. Bloomberg The Market Recap newsletter is a wrap of the day’s trading.
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