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Copper drives Rio’s pursuit of Glencore M&A
| Tie-up would create ‘critical mass’, analysts say
BY FRÉDÉRIC TOMESCO
R
io Tinto’s (NYSE, LSE, ASX: RIO) interest in acquiring Glencore (LSE: GLEN) stems from a will to control future copper output before supply shortages drive up prices further, analysts said. Glencore and Rio disclosed Jan. 8 they were holding preliminary talks 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. A premium of 15% to 30% to Glencore’s early January share price could get the deal done and avoid spurring rival BHP (NYSE, LSE, ASX: BHP) to bid for the company, RBC mining analyst Ben Davis said in a Jan. 16 report, citing conversations with investors. That could value Glencore at as much as $121 billion (C$167 million). Securing copper – not creating near-term value – is the key rationale for the transaction, Davis stressed. “The desire to create critical mass in copper production is really what’s driving this type of deal,” Gold Royalty (NYSE: GROY) CEO 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 allshare 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 as the world’s larg-
Glencore’s Horne copper plant in Rouyn-Noranda, Que., Canada’s only red metal smelter. GLENCORE PM44082538
est 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 cannibalization 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. Rio, which expanded into lithium last year with the $6.7-billion acquisition of Arcadium Lithium, expects commodities output to rise
“What this consolidation speaks to is the severe lack of developmentstage projects available in the copper business.” DAVID GAROFALO CEO, GOLD ROYALTY
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 (LSE: AAL) 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
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