Source : the age
A potential $254 billion mega-merger between Rio Tinto and Glencore would create a mining behemoth with a powerful position in the crucial copper market, but any such deal could face challenges from regulators and environmentally conscious investors, analysts said.
Rio Tinto shares fell 0.7 per cent to $118.74 on Friday, after Bloomberg reported that Rio had been involved in early-stage merger talks with Glencore, a deal that would create a mining superpower.
It’s unclear if the talks remain active, as Rio and Glencore both declined to comment, and analysts said the report of the early-stage talks was a surprise. But industry observers said copper – a vital mineral for the green energy transition – would have been a key part of the talks.
A deal would potentially create a $US158 billion behemoth to leapfrog longstanding industry leader BHP, which is worth about $US126 billion.Credit: Getty
If the giants did merge, the combined business would leapfrog BHP – worth $203 billion – to become the world’s largest mining company, and the second largest copper producer.
MPC markets chief executive Mark Gardner said the deal would “fill gaps” in each of the companies’ portfolios, and create a massive supplier of copper, which is in demand due to the clean energy transition and growing AI demand.
“It’s about copper and critical minerals, and the deal would make them an absolute powerhouse,” Gardner said. “But with that many critical minerals in one hand, I dare say it might hit regulatory issues.”
Ray David, portfolio manager at Sydney-based Blackwattle Investment Partners, which owns Rio shares, said there were merits for a combination with Glencore as it would reduce exposure to iron ore amid flattening demand in China while boosting exposure to the world’s intensifying demand for copper in the clean energy shift.
“Copper supply is dwindling, and the capital intensity of assets is increasing significantly due to deeper ore bodies and lower grades, making existing large-scale mines highly valuable,” David said.
Glencore’s former CEO Ivan Glasenberg still owns 10 per cent of the company.Credit: Simon Dawson
However, it remained unclear what financial terms would be needed to ultimately seal a merger deal, added David, “particularly the premium needed to acquire Glencore”.
David said reports that initial talks may have already ended without leading to a deal reflected the discipline of Rio Tinto’s board and management, and that they’ve “learned from past, top-of-the-cycle deals that eroded shareholder value”.
Hugh Dive, chief investment officer at Atlas Fund Management, said the reported deal talks were “obviously about copper”, noting that Rio’s consideration of the merger may suggest concerns about the future of iron ore as Chinese demand slows.
“If I was a Rio shareholder, the concerns are you’re getting back into coal after they spent a lot of time getting out of it … they’ve been big on decarbonisation and you’re reversing that,” Dive said.
Rio Tinto divested the last of its coal mines in 2017, and has since proudly been the largest major global miner to be rid of fossil fuels. Glencore’s extensive ownership of coal mines in Australia and around the world may present an obstacle to the companies’ combination.
Rio Tinto still earns most of its money from mining iron ore in Western Australia’s minerals-rich Pilbara, but it has embarked on a strategic push to diversify its business, including bolstering its supplies of copper, a raw material used in electrical wiring, renewable energy, and electric cars.
Analysts on Friday said reports of discussions between Rio Tinto and Glencore, albeit at an early stage, were “still a surprise”. It was unclear whether Rio and Glencore had considered a straight merger or a break-up of parts of the company.
RBC Capital Makers analysts Kaan Peker and Ben Davis said BHP’s unsuccessful approach to acquire London-listed miner Anglo American in a $75 billion deal last year “may well have catalysed the talks” between Rio Tinto and Glencore.
“We would not expect a straight merger to happen as we believe Rio shareholders would see it as favouring Glencore, but its possible there is a deal structure out there that could keep both sets of shareholders and management happy,” Peker and Davis said.
“The M&A parlour games that we saw last year will undoubtedly start again in earnest.
“Concerns are pervasive about the long-term margin decline as the Chinese super cycle slows and the cost curve flattens with falling seaborne iron ore demand.”
Rio Tinto is the world’s second-biggest miner, with a market value of about $US103 billion ($166 billion) at the close of trading in London on Thursday, before the report emerged, while Glencore was valued at about $US55 billion.
The mining industry has been galvanised by a wave of dealmaking in the past couple of years, driven largely by a desire by the biggest producers to expand in copper — a metal central to the world’s decarbonisation efforts.
Glencore, which proposed a merger with Rio in 2014, has been one of the most aggressive dealmakers in the sector. Its former CEO Ivan Glasenberg, who spearheaded the earlier approach to Rio, still owns almost 10 per cent of the company.
Buying Glencore would give Rio a stake in the Collahuasi mine in Chile, one of the richest deposits, that the company has coveted for more than a decade.
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