Glencore's backdoor play for Rio

Last year's Glencore-Xstrata merger gives some clues as to the strategy Glencore's CEO will use to stalk Rio Tinto.

Glencore chief executive Ivan Glasenberg wants to create the biggest mining company in the world, but to do that he needs iron ore, and Rio Tinto’s got truckloads of it.

But while the merger would be Glasenberg's dream come true, there’s nothing in it for Rio.

Speculation about Glencore and Rio Tinto has been swirling in the market for weeks, and like a lot of things, it’s all about the timing. Glasenberg has a knack for getting in at the bottom of the market and enjoying the ride up, so it’s little surprise he’s chosen now to pounce.

As Eureka Report’s Tim Treadgold has pointed out previously, Glasenberg is an ‘owner-driver’, with an 8 per cent shareholding in Glencore. So he has more negotiating clout than the average Rio director, even without formal board approval.

But he may not get very far in his quest this time.

It’s likely that Glencore proposed an all-scrip merger of equals when it approached Rio bank in July. Rio, of course, wouldn’t entertain that notion for very long. While Glencore is closing the distance between the two companies’ market values – Rio’s London-listed market cap is £56.54 billion compared with Glencore’s £44.8 billion – Rio’s share price has been battered this year due to the slumping iron ore price, so its supporters think it's trailing at a discount.

Now, Glencore’s gone on the offensive and turned to Rio’s largest shareholder, Chinalco, to get the deal done. It’s a move straight out of Glasenberg’s playbook. When he merged Glencore Xstrata last year, the key player in the game became Xstrata’s biggest shareholder, the sovereign wealth fund of Qatar.

But will the same play work again? Glencore has taken the next logical step in going to Chinalco, but the key will be convincing the Chinese state-backed company that it’s in their best interests too.

When Glencore took over Xstrata, one of the demands made by the Chinese was that it sell off its Las Bambas copper assets, so they could play the same game here and demand that Glencore offload coal, aluminium or copper assets in return for their support.

Unlike Rio, Glasenberg will be salivating at the prospect of a merger. Such a deal -- if it got past the regulators -- would give him access to better quality and higher-margin assets, at a cheap price. But from Rio’s point of view, it’s difficult to see what synergies would be gained. Glencore and Rio are vastly different businesses, with inherently different cultures.

There would be one key benefit to the merger for disgruntled Rio shareholders: it would rid it of its one-trick pony status and spread the risk across a range of resources.

There’s also the chance that Glasenberg could have an entirely different, and much less ambitious, plan in mind.

Glencore has made no secret of the fact that it is frustrated with Rio for not continuing negotiations on a thermal coal joint venture in NSW’s Hunter Valley.

If Glencore were to get its hands on Chinalco’s holding, it could push for a board seat on Rio and then use that position to facilitate a merger of Hunter Valley coal operations.

“Glencore analysts were out here last week, and the proposal was that there was potentially a half a billion dollars of savings to be had by merging Hunter Valley coal assets in terms of synergy benefits,” says Tim Schroeders of Pengana Capital.

It may not be the bold plan the market is betting on (Rio’s shares are up 3.6 per cent at the time of writing), but it could be just enough for Glasenberg to put the pressure on.

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