Tantamount to a long game of chess, internal manoeuvrings by Glencore PLC (LSE: GLEN) suggest that the Swiss commodities group could be preparing to finally complete what it failed to do in 2014: Merge with Rio Tinto (ASX: RIO).
What appears to be setting the scene for a mega mining merger is the recent transfer of around $22 billion in foreign assets into its Australian subsidiary - Glencore Investment Pty Ltd. This doubles the total assets held by Glencore’s Australian entity to $42 billion.
Consolidated assets within an Australian entity
Glencore's restructuring consolidates its coal mines in Canada, South Africa and Colombia, a major copper project in Argentina, and South African manganese, chrome and vanadium operations under its Australia-based entity.
All coal operations - including the company’s thermal and metallurgical coal assets in New South Wales and QLD - have also been centralised within the Australian unit.
It’s the centralisation of key assets into a single jurisdiction closer to Asia which analysts believe could ease the path to a mega-merger transaction.
It’s understood that a behind-the-scenes approach by Glencore to Rio Tinto has already received a much better reception than the tone of flat-out rejection of a merger proposal over a decade ago.
Potential spin-off scenario
In a recent client note Citi speculated that Glencore could spin off its coal arm while Rio Tinto acquires the remainder, referred to as "Metalco" - giving Rio access to Glencore’s highly profitable trading division and strategic base metals assets.
However, in addition to significant valuation and strategic hurdles, for such a deal to succeed, Rio would be expected to fork out a considerable premium.
Given that Glencore shares have underperformed Rio by nearly 30% over the past 18 months, a fair offer, notes Citi would have to recognise this disconnect.
Major synergies are needed
Based on analysts' numbers, the sort of synergies needed to justify the transaction would have to exceed $1 billion annually.
A key attraction for Rio could be diversification into high-growth commodities such as copper.
However, Rio has historically avoided coal, which accounted for 38% of Glencore’s 2023 earnings.
As a result, working on how to keep these entities apart will clearly underscore future merger discussions.
Given its refocus on copper, Glencore’s undeveloped Mara project in Argentina - a brownfield copper-gold project that ranks as one of the lowest capital-intensive copper projects in the world – would clearly complement Rio’s existing portfolio.
Interestingly, Glencore’s ongoing merger talks will be on with a potentially more receptive leadership lineup at Rio with CEO Jakob Stausholm having recently been forced to resign.
It’s no secret that Stausholm has been cautious about any future consolidation, which may be one of many reasons why the board wants him out.
Assuming no tie-up between Glencore and Rio eventuates, the structure now in place gives Glencore strategic flexibility, either to spin off assets or seek other merger partners.
It’s also flagged that Glencore’s coal assets would trade at a much higher multiple in Australia than in London.
