With the time limit for a Rio Tinto (NYSE, LSE, ASX: RIO) bid to acquire Glencore (LSE: GLEN) expiring this Thursday, The Northern Miner offers another look at how the quest for copper underlies the talks, including comment from Gold Royalty (NYSE: GROY) CEO David Garofalo and former Anglo American (LSE: AAL) CEO Mark Cutifani.
Glencore and Rio said Jan. 8 they were holding discussions about combining some or all of their businesses in a deal that could create the world’s largest miner. Under U.K. securities rules, Rio Tinto has until 5 p.m. (London time) on Feb. 5 to either declare a firm intention to make an offer for Glencore or announce that it doesn’t intend to make an offer.
The talks stem from will to control future copper output before supply shortages drive up prices further, analysts such as Ben Davis at RBC said. A premium of 15% to 30% to Glencore’s early January share price could get the deal done, Davis said in a Jan. 16 report. That could value Glencore at as much as $121 billion (C$167 million).
“The desire to create critical mass in copper production is really what’s driving this type of deal,” David Garofalo, a former Hudbay Minerals (TSX, NYSE: HBM) head who has spent about half his career in the base metals industry, told The Northern Miner in an interview.
“What this consolidation speaks to is the severe lack of development-stage projects available in the copper business. There hasn’t been any exploration done to meet the demand requirements for copper, which is growing exponentially given the desire to electrify the global economy and decarbonize. There’s a significant supply crunch in place that’s amplifying over time. So if you’re not able to build, you’re going to have to buy to create critical mass.”
Topping BHP
Possible scenarios include an all-share merger between the companies, Glencore and Rio said. Glencore’s market capitalization was about £56.6 billion ($105 billion) as press time neared, while Rio’s was about A$211 billion ($187 billion).
A combined “GlenTinto” would leapfrog BHP (NYSE, LSE, ASX: BHP) as the world’s largest mining company by market value, while significantly boosting Rio Tinto’s long-term copper exposure at a time when electrification-driven demand growth is colliding with a thin project development pipeline.
Glencore’s copper assets are the real prize for Rio. They include a 44% share in the Collahuasi copper mine – a joint venture with Anglo American – in Chile, which investors see as its crown jewel, Davis wrote.
“This is all about Glencore’s copper business, in our view, and it’s easier to gain access to some of the best assets globally at a lower relative valuation via cannibalisation of another large cap, although navigating the spin-outs [or] asset sales of unwanted assets may be challenging,” BMO Capital Markets mining analyst Alexander Pearce wrote in a Jan. 19 note.
Lithium
Rio, which expanded into lithium last year with the $6.7-billion acquisition of Arcadium Lithium, expects commodities output to rise about 3% annually by 2030 as new assets such as Guinea’s Simandou iron ore mine and Mongolia’s Oyu Tolgoi copper complex start producing.
Copper accounted for about a quarter of Rio’s first-half pretax earnings, which rose 69% to $3.1 billion, the company said Jan. 20. Copper revenue jumped 41% to $6.2 billion.
News of the negotiations with Glencore comes as Anglo American and Teck Resources (TSX: TECK.A, TECK.B; NYSE: TECK) work to complete a $53-billion mega-merger that would create of one of the world’s largest copper producers. Canada’s federal government approved the tie-up in December, though other regulatory hurdles remain.
Copper prices have set multiple records in recent weeks as supply disruptions and U.S. trade uncertainty fuel a sharp rally for base metals.
Financial muscle
Mergers and acquisitions give companies “market presence, but also a bigger balance sheet to approach the next cycle of mine development,” Garofalo said. “The industry needs to invest in development-stage projects because consolidation in the copper industry is a zero-sum game. It doesn’t create additional supply.
“These companies are going to have to invest in development, and they’re going to be much better equipped to invest the tens of billions of dollars required to meet the supply requirements of the global economy,” he added.
RBC’s Davis wrote Rio has “got a lot right” in recent years in developing Oyu Tolgoi and Simandou, but “the growth beyond this current phase is far less exciting with projects either too small to make a difference or still in the development phase or stuck in courts.” Those include copper assets such as Resolution in the U.S. and Nuevo Cobre in Chile.
As a result, Davis said he expects Rio to offer a 27% premium to Glencore’s “undisturbed,” or pre-announcement, share price. On Jan. 16, he raised his target price for the stock to 530 pence.
Glencore was trading at 501 pence in London on Monday, taking its climb this year to about 23%. Rio shares were trading at A$149.98 up about 1.6% this year.
Simple is best
Most investors polled by RBC agree that Rio should keep the deal as simple as possible to avoid repeating the mistakes BHP made when it tried to buy Anglo. This means bidding for all of Glencore – including its coal business.
With BHP also in the market to add copper assets, “Glencore finds itself in a strong position,” Davis wrote. “We believe they’re a willing seller, assuming they are compensated for a loss of control, and will entertain any sort of deal structure.”
After dumping the last of its coal assets in 2018, “Rio might have to get its hands dirty again,” the RBC analyst said. “However, we don’t believe it would be that hard to get rid of coal later down the line. Glencore already did the work, placing their coal business into a separate Australian subsidiary.”
Complementary pieces
Cutifani, who ran London-based Anglo American between 2013 and 2022, argues there’s more to the proposed deal than just the red metal.
“It’s broader than copper,” Cutifani – who held talks with Rio at various points during his stint at the helm – told The Northern Miner by telephone. “Copper is clearly important to both, but Rio also has a very good iron ore business and Glencore has the industry’s leading marketing and trading business. So there are some elements that in my view are quite complementary.”
“People will know from my history that I was always keen on an Anglo-Rio combination years back, but Rio-Glencore is potentially a very solid combination.”
Rio and Glencore investors are eagerly awaiting details of potential synergies.
Savings could include marketing spending, shared central services and head office costs, with total estimates among investors surveyed by RBC ranging from $3.7 billion to $10.4 billion. That’s well below the $17 billion required for the deal to break even in case of a 27% premium, Davis said.
“The benefits from economies of scale are not infinite and there will be a significant clash of cultures from trying to push these very different companies together,” he wrote. “The entire command structure of Glencore will likely have to be dismantled, as marketing goes from running the show to being a bolt on to the business.”
One thing seems certain: if it happens, the Rio-Glencore deal won’t be the last big copper merger.
“For other players to be competitive on the copper side there will need to be other combinations,” Cutifani said. “Technologies and innovations require strong balance sheets and long-term thinking. This is critical for the future of the industry. That’s why I believe these types of consolidations are important.”
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