REPORT: Glencore Eyeing Rio Tinto in Takeover Bid
Glencore PLC (LSE:GLEN) is looking to make its next big move as the mining world continues to struggle with volatile commodity markets.
The Swiss-based company, which has a stout reputation of growing through acquisitions, reportedly has its eye on Rio Tinto as iron ore prices continue to plunge, reaching a new five-year low.
A takeover attempt at current prices, however, seems improbable.
According to Pengana Capital fund manager Tim Schroeders, Rio Tinto is definitely on CEO Ivan Glasenberg’s radar but the company is unlikely to make a move.
“Where the two companies currently sit market cap wise, I doubt whether Glencore would be that aggressive,” Schroeders said.
Glasenberg, who has an impressive history of buying assets at the bottom of the market, has snatched up Xstrata, Viterra and Caracal in the space of just the last two years.
The ability to have the quality asset base of any of the top-three iron ore players makes perfect sense for Glencore.
“They would love to be in iron ore longer term without spending the significant capital needed for a greenfields development,” Schroeders adds.
Merger of the century
If the deal actually happened, sources in the industry believe there would be “massive regulatory issues” around a Rio-Glencore merger.
“Let’s face it, they (Glencore) had to sell Las Bambas to do Xstrata (merger), what would they have to sell to do Rio?”one resource fund manager said about the potential deal.
“They couldn’t even pull off the nickel merger with Vale in Canada.”
While Glencore doesn’t have the quality assets of Rio Tinto or BHP Billiton, the company has a phenomenal management organization.
“The argument within Glencore is that management have had to work harder because of (the company’s) lesser-quality assets and their internal belief is that they do it better than BHP and Rio because they are not blessed with wonderful assets.”
A merger with Glencore would give Rio shareholder “the best of both worlds” including a chance to share in potential upside in Glencore’s coal, copper and nickel mines.
“A Rio Tinto-Glencore combination would create market leading positions in iron ore, copper, nickel, zinc and coal as well as significant optionality around a number of lesser metals and minerals,” said Paul Gait, senior analyst for Wall Street brokerage Bernstein Research.
“Moreover, it would create the biggest and most diversified mining company on the planet. It would be a Glencore-Rio combination that would quickly become the ‘most own’ stock for anyone looking for mining exposure.”
With Glasenberg at the helm, anything is possible.
Global iron ore production to recover by 5.1% in 2021
Global iron ore production fell by 3% to 2.2bnt in 2020. Global production is expected to grow at a compound annual growth rate (CAGR) of 3.7% to 2,663.4Mt between 2021 to 2025. The key contributors to this grow will be Brazil (6.2%), South Africa (4.1%), Australia (3.2%) and India (2.9%). Key upcoming projects expected to commence operations include South Flank in Australia (2021), Zulti in South Africa (H2 2021), Serrote Da Laje in Brazil (H2 2021) and Gudai-Darri (2022), according to GlobalData, a leading data and analytics company.
Vinneth Bajaj, Associate Project Manager at GlobalData, comments: “Declines from Brazil and India were major contributors to the reduced output in 2020. Combined production from these two countries fell from a collective 638.2Mt in 2019 to an estimated 591.1Mt in 2020. The reduced output from the iron ore giant, Vale, was the key factor behind Brazil’s reduced output, while delays in the auctioning of mines in Odisha affected India’s output in 2020.
“Miners in Australia were relatively unaffected by COVID-19 due to effective measures adopted by the Australian Government, while a speedy recovery in China led to a significant 10.4% increase in the country’s iron ore output.”
Looking ahead, the global iron ore production is expected to increase by 111.3Mt to 2,302.5Mt in 2021. Rio Tinto is expected to produce up to 340Mt of iron ore, while BHP has released production guidance of 245–255Mt, supported by the start of the Samarco project in December, which is expected to produce between 1–2Mt.The company has retained its guidance for Australian mines at 276–286Mt on a 100% basis, due to scheduled maintenance work at its ore handling plant and tie-in activity at the Area C mine and South-Flank mine.
Bajaj added: “The remaining companies are expected to produce more than 600Mt of iron ore, including FMG, whose production is expected to range between 175–180Mt supported by its Eliwana mine that commenced operations in late December 2020, and Anglo American, which is expecting to produce between 64–67Mt. Vale is expected to resume 40Mt of its production capacity, taking its overall production capacity to 350Mt in 2021, with production guidance of 315-335Mt.”