The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Antony Currie
MELBOURNE, Jan 9 (Reuters Breakingviews) - M&A bankers will be rubbing their hands with glee at the news Rio Tinto RIO.L RIO.AX and Glencore GLEN.L are back in preliminary talks. The mining giants said on Thursday they're discussing a number of options, including a full, all-stock deal with Rio as the acquirer. That would put the combined company's market worth at $207 billion. But follow-on deals could bump up the value to shareholders by 50% or more, unlock other benefits and even prompt rival BHP BHP.AX to act.
The two have mulled getting together in the past, most recently around a year ago. A couple of things have changed since those conversations ended. First, Rio has a new CEO, Simon Trott, who took the helm in August. Second, the pending $54 billion tie-up of Anglo American AAL.L and Teck Resources TECKb.TO has increased peers' fears of missing out on any further consolidation. Those may help overcome obstacles like valuation and culture clashes.
Glencore offers what Rio and BHP crave – further diversification from iron ore in the form of copper, a key metal in the energy transition whose price per tonne surpassed a record $13,000 earlier this week.
Trouble is, the Swiss-based firm run by Gary Nagle also has assets Trott might not be so keen on, not least coal. Rio sold the last of its mines in 2018 to Glencore.
Moreover, a standalone metals business containing a mix of copper, aluminium, lithium and zinc could trade at more than 10 times EBITDA for the next 12 months, based on the average multiple of Southern Copper SCCO.N, Freeport-McMoRan FCX.N and Antofagasta ANTO.L. To compare, Rio, BHP and iron ore specialist Fortescue FMG.AX trade at an average just north of 6 times EBITDA, and fossil fuel excavators Whitehaven Coal WHC.AX and New Hope NHC.AX at around 5.5 times. Spinning off or selling those carbon-heavy businesses may add some $100 billion to shareholder value, Breakingviews calculates.
That's not all. China's Chinalco owns 14.5% of Rio, just below the cap imposed by the Australian government, and has not wanted to sell any shares. That has tied Rio's hands on buybacks. An all-stock merger with Glencore would dilute the state-owned enterprise and give scope for decent stock repurchases. And if a spun-out iron ore business were only listed in Sydney, as opposed to Rio's current set-up of 75% of shares on the London Stock Exchange, it would be able to pass on more of the $9 billion or so in Australian dividend tax breaks known as franking credits that are currently on the books.
If such a breakup were to unlock significant value, the pressure would build on BHP CEO Mike Henry to follow suit and carve out his copper business – assuming he doesn't launch a bid for Nagle's firm himself. In any event, a Rio-Glencore combo would be an M&A gift that keeps on giving.
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CONTEXT NEWS
Rio Tinto and Glencore are in "preliminary discussions" about combining some or all of their businesses, the two miners said in regulatory statements on January 8. The possibilities include an all-share merger with Rio acquiring its smaller, Switzerland-based rival.
It's the second time in a year that the two companies have held talks about a tie-up.
(Editing by Robyn Mak; Production by Ujjaini Dutta)
((For previous columns by the author, Reuters customers can click on CURRIE/antony.currie@thomsonreuters.com))
