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To a hammer, everything looks like a nail. For mine operators, empty spaces on the map look like opportunities for exploration and excavation. This has created an industry with two enduring habits: a tendency toward overproduction and a penchant for bold but ill-advised corporate mergers.
Reports that Rio Tinto and Glencore broke off negotiations last year exemplify the second of these characteristics.
The company’s mega-deals surfaced a decade ago. Glencore, then run by the frivolous Ivan Glasenberg, had already completed a major merger with Xstrata. Rio’s generous access to high-grade iron ore was a coveted asset. Prominent mining banker Ian Hunnam told hedge funds at the time that a deal would happen sooner or later.
The logic is different today, but it still exists. Previously obsessed with China’s growth, it is now focused on the transition to green energy. Copper, which is mined by both Glencore and Rio, is a key raw material. Glencore’s superior trading, transportation and marketing capabilities could allow it to squeeze some additional value out of Rio’s annual sales of around $50 billion. Every miner has assets they don’t need to offload or areas they want to bulk up on.
But like the mining project itself, the transaction looks easier from space. In reality, it is difficult to bring together major producers. If rival mines are located nearby, significant cost savings can be expected, similar to the logic behind BHP Billiton’s failed bid for Rio in 2008 and then Anglo American in 2024. However, beyond that, there is little room for cost reductions. Large customers, especially China, have strong views.
On the other hand, valuations tend to fluctuate in cycles, and management is reluctant to sell at low prices. Relative valuations for Rio and Glencore have converged since 2014, with Glencore commanding a modest premium 10 years ago, compared to a modest premium for Glencore a decade ago, according to LSEG. It is trading at twice the price. But as a smaller partner, Glencore shareholders will want a premium on its $55 billion market capitalization or want to take control, which could mean paying a hefty price for Rio. Dew.
As it happens, both miners have other things to focus on. Glencore has scrapped plans to spin off its coal business, which accounts for about a third of its EBITDA. But boss Gary Nagle still needs to figure out what to do with the business, which brings in lots of cash but hurts Glencore’s valuation. Rio must grapple with weak demand in China and the political challenges of Mongolia’s huge copper operation.
These are worth noting. But as commodity cycles rise and fall, the idea of megamergers is bound to return at some point. The allure of being the king of the mountain never loses its luster.
john.foley@ft.com
camilla.palladino@ft.com
