The year has barely kicked off and we already have a blockbuster deal on the table to salivate over. Will it happen or will it fizzle out? Either way, you can be sure that the Glencore-Rio Tinto opportunity is going to be a feature of some of the major headlines this year.
After a rather tame first week of the year on the JSE from a SENS perspective, it was Glencore that got the market all hot under the collar with a spike of nearly 14% in response to an announcement regarding a potential deal with Rio Tinto. The price eventually settled 10.5% higher on the day. To be precise, the mining giants are looking at a “possible combination” of “some or all of their businesses” – in other words, they aren’t being very precise at all.
This is deliberate, as the public announcements are designed to give as much wriggle room as possible. Flexibility is always your friend in life, especially in dealmaking. But they do go on to give another important nugget: they expect that any such merger would take the form of Rio Tinto acquiring Glencore via a scheme of arrangement.
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Based on this comment, it sounds like the deal on the table would be a mega-merger that might carve out some unwanted parts of the group along the way. Again, nothing is certain at this stage and everything is subject to the final negotiations. Still, we know that Glencore’s market cap is R1.33-trillion and Rio Tinto is worth more than R2.2-trillion.
It would make sense for Rio Tinto to be seen as the acquirer here. If the deal goes ahead, it looks like it could create the world’s largest mining company (BHP’s current market cap is roughly R2.6-trillion). It’s going to be particularly interesting to see what the regulators think about that.
Mining consolidation is not a new concept, although we’ve certainly seen a strong recent acceleration in this trend. The most interesting feature of the recent activity is that instead of deals that are creating more diversified groups across commodities, we are typically seeing efforts to create larger groups (with scale benefits) that play in a more focused basket of commodities. The main driver of these deals is the push into transition metals like copper, leading to a repositioning of the pieces on the mining chess board into groups focused on non-transition commodities and those who are playing in only the transition metals.
This makes sense in theory, since the mining houses with legacy assets (like coal) should trade at structurally different valuations to the houses focused on copper with its applications across electric vehicles and data centres. Naturally, value investors will be drawn more towards the “dirty” assets that have demonstrable cash flows and don’t require heroic (risky) assumptions about future demand. These dirty assets will typically trade on a fat dividend yield and thus a low earnings multiple.
Conversely, the “clean” transition assets will be full of promises about a green future. They will have designer websites with pictures of renewable energy projects and Very Happy Humans Living Their Best Lives. ESG consultants will have bills to send.
This will undoubtedly mean a lower dividend yield due to a higher valuation multiple. As always, there will be ways to make money on both types of assets. There will also be ways to lose money.
These are very different types of investments. You may recall that BHP made a play for Anglo American in 2024, with the latter’s board fending off the bid by noting the complexities that BHP required for the implementation of the merger.
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