Rio Tinto and Glencore seemed to be getting close to a $200bn-plus merger before talks collapsed last week, killing a deal that would have created the world’s largest mining company and a copper producer controlling about 7% of global supply.
Business Day can today report that Rio Tinto did not seek an extension to the discussions to comply with UK takeover rules, because it dawned on it that the parties were too far apart to reach any agreement.
A low opening valuation, pitched at a moment when coal was depressed and iron ore buoyant, hardened into a bargaining impasse that neither side could swallow politically.
Rio’s pitch read like a classic opportunistic play in which it would buy a cyclical asset at the trough.
“Rio Tinto came in with a low valuation of Glencore, and this was thought to be a typical negotiating strategy. However, they started low and never moved. They anchored themselves to the undisturbed share price pre-leak [stock’s price movement before private information becomes public],” according to a source with intimate knowledge of the negotiations.
“This can only come from a combination of inexperience and poor advice, led by a lack of understanding of the commodities industry.”
The source said the valuation mismatch was a product of timing tactics in which Rio’s opening offer reflected a market snapshot that favoured iron ore over coal.
The numbers that shaped the talks are visible in market moves over the past months. Newcastle thermal coal has firmed from the mid-$90s to roughly $108-$116 per tonne, while the price of steelmaking coal is close to $250 per tonne. Iron ore has softened into the $100-102-a-tonne area.
Rio Tinto thought they could get Glencore on the cheap. When the discussions started, coal prices were low and iron ore prices were high. Glencore is heavily exposed to coal, and Rio Tinto is heavily linked to iron ore.
— Source
“Rio Tinto thought they could get Glencore on the cheap. When the discussions started, coal prices were low and iron ore prices were high. Glencore is heavily exposed to coal, and Rio Tinto is heavily linked to iron ore,” the source said.
“If you start a negotiation when coal prices are low and iron ore prices are high, of course the relative value between the two companies is going to be large. Rio tried to be opportunistic and come for Glencore at a time when coal prices were lower and iron ore prices were high.
“If you look at where things are today, iron ore prices are going down and coal is picking up. You cannot in such a deal look at a moment in time and say, ‘This is where we value the company.’”
Market values and copper assets
Glencore, for its part, Business Day understands, took the position that the parties must take a long-term view of the businesses and take a consensus view of the cash flows and what the historical market values of the two companies were over a number of years.
Rio Tinto played hardball on this, leading to the collapse of the negotiations. Glencore also felt Rio Tinto didn’t put adequate value on its copper assets, the main drawcard for the deal and arguably the best copper pipeline in the industry.
“They never got to a valuation number that Glencore would seriously consider.”
Glencore believed it should have 40% of the combined business that would have created a $260bn mining behemoth.
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A 40% exposure to the combined group was seen as a fair outcome by Glencore’s major shareholders, who include Ivan Glasenberg, the Public Investment Corporation, BlackRock, Coronation and Allan Gray.
Rio Tinto’s attitude was that Glencore’s demand inflated its value, and the deal was not in the best interest of its shareholders.
For its part, Rio thought a 69%-31% split was more sensible — creating a yawning multibillion-dollar valuation gap between the two parties.
The merger bids of 2014 and 2024 were made by Glencore, with Rio flipping the script in what would have been the biggest mining deal yet, dwarfing Glencore’s $90bn acquisition of Xstrata in 2013.
Another sticking point was Rio Tinto’s insistence that it retain both the board chair and CEO roles of the combined entity, but at the low valuation proposed by Rio Tinto and with no takeover premium, this was not acceptable to Glencore.
The collapsed deal comes amid huge consolidation in the copper industry, as mining majors look to take advantage of rising global demand for the metal, driven by the green energy transition.
Demand for copper, which is expected to increase by 50% by 2040, has risen 40% in the past year.
Anglo American is also pursuing a merger— with Canadian copper producer Teck — in a deal worth about $50bn. The transaction, which has already been endorsed by both sets of shareholders, will create the world’s fifth-largest copper producer.
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