A deal aimed at capturing a bigger slice of the metals market, the proposed $160 billion merger of Rio Tinto and Glencore, appears doomed to fail, just as last year’s $50 billion attempt by BHP to acquire Anglo American also failed.
While not officially confirmed by either Glencore or Rio Tinto the potential deal has sparked financial market speculation but little investor support.
Unveiled during the trading hours of the Australian stock exchange where Rio Tinto is listed (along with London) the share price of the world’s second biggest miner slipped 0.7% lower to A$118.74.
Glencore is not listed in Australia with investors waiting for London trading to pass judgement which is not expected to be positive.
Like the move by BHP, the world’s biggest miner on Anglo American, a South African corporate hero, the obstacles of a Rio Tinto/Glencore deal are high and certain to spark endless government inquiries if proceeded with.
China, in particular, is certain to be wary of two major copper producers merging given the heavy dependence of its giant manufacturing sector on that metal.
7% Of The Copper Market
Other countries with an interest in energy transition, where copper is in high demand thanks to its electrical conductivity, would also look closely at a Rio Tinto/Glencore merger which would create a business controlling 7% of the global copper market.
First report of Glencore and Rio Tinto exploring a merger was carried earlier today in a Bloomberg story and appear to be based on discussions held around the middle of last year, just after Anglo American officially rebuffed BHP’s overtures, but before a trigger date for a possible revival was reached late last year.
The timing could indicate that management at either Rio Tinto or Glencore was concerned that if BHP returned with a better offer for Anglo American their combination would create a clear global mining industry leader.
The failure of BHP to return to its bid for Anglo American saw the Rio Tinto/Glencore proposal drift until flushed to the surface by Bloomberg.
What both possible mergers tell investors is that the mining market if shifting away from a traditional focus on basic industrial materials and fuels such as iron ore and coal towards new energy materials such as copper and lithium for use in batteries and other forward-facing materials such as potash to meet growing demand for crop fertilizer.
Apart from the challenge of winning government approval Rio Tinto would have difficulty obtaining shareholder support for a merger with Glencore, which is a major coal producer. Rio Tinto sold all of its own coal assets four years ago.
A coal spin-off, which is something Glencore has considered in the past could resurface but the process would take time and might not yield an acceptable result.
Matthew Haupt, a portfolio manager at Australia’s Wilson Asset Mangement which owns Rio Tinto shares, told the Financial Times newspaper that the proposed Rio Tinto/Glencore deal “didn’t make a lot of sense”.
Glyn Lawcock an analyst with Sydney-based investment bank Barrenjoey, said there was little overlap between Rio Tinto and Glencore, meaning synergy benefits from a deal would need to be justified by asset diversification and creating more scale.
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