By Melanie Burton
MELBOURNE, March 12 (Reuters) – Glencore CEO Gary Nagle is hoping a recent surge in coal prices will help bring Rio Tinto back to the table for a fresh attempt at creating the world’s biggest mining company, three investors said, after meeting with leaders of both companies in Australia this week.
The two were locked in talks earlier this year to forge a $240 billion company that would tie together Glencore’s marketing business and copper assets with Rio Tinto’s operational expertise to serve fast-growing demand for the red metal.
Discussions ended with no deal in February due to disagreements on valuation, the companies said at the time. Under UK rules, Rio Tinto can’t restart talks with Glencore for six months.
Glencore CEO Gary Nagle was optimistic about the prospect of another opportunity to agree a deal, the three investors said, speaking on condition of anonymity as the discussions were private.
“This is definitely not going away, unfortunately,” said one investor, who does not see value in a merger.
Details of discussions with Australian investors have not previously been reported.
Glencore and Rio Tinto declined to comment.
“Ultimately we formed the view that we couldn’t stand up a value case, and that’s where it stands,” Rio Tinto CEO Simon Trott said on a media call in February after the talks ended.
GLENCORE COUNTS ON COAL PRICE RISE, IRON ORE DECLINE
Glencore’s shares have outperformed Rio Tinto’s so far this year, opening the way for the Switzerland-based commodity trader and miner to argue it would be entitled to a larger slice of any combined company.
In Glencore’s view, according to the sources, one sticking point was that Rio’s valuation of Glencore was tied to the spot price of key commodities like coal on January 7, the day before talks became public.
Nagle said a more measured view would have been to also take projected prices into account, according to the investors.
Since January 7, coal prices and Glencore’s shares have jumped 26%, while Rio’s shares have climbed 9%, with a dip in iron ore prices dragging on its gains.
With those moves, Glencore shares now represent about 35% of a combined market value in a Glencore-Rio Tinto tie-up, up from 31.5% when the talks became public and closer to the 40% that Glencore was pushing for as part of the deal rejected by Rio.
Glencore anticipates Rio Tinto’s flagship iron ore division will suffer as the market tips into surplus, the sources said. That would further drive a shift in the relative value of the companies, making a deal easier to do, in Nagle’s view, they said.
For some Australian investors, the prospect of Rio reacquiring coal assets made little sense after it sold them to improve its green credentials. Nagle told investors Australia was a bit behind Europe, for which ESG was “no longer an issue” for coal, one source said.
VOCAL MINORITY OPPOSED A DEAL
While valuation was the main obstacle to a deal, five Australian funds wrote a joint letter to Rio Tinto’s board on January 20 expressing additional concerns including on governance, given corruption probes into Glencore’s business practices, sources said.
Glencore’s view was that the Australian contingent represented a very small but noisy minority, at around 4% of the total shareholder base.
But the sources highlighted that over half of dual-listed Rio Tinto’s profits come from its Australian assets and as such, any merger could have an outsize effect on the country, with government approval required for a deal. Also, any deal would need the approval of 50% of ASX shareholders present and voting and 75% of the votes cast.
Glencore underestimated the Australian bloc, but the company’s roadshow was proving effective, said the first investor, who viewed Glencore as investable if it listed Down Under, but added the proposed deal did not present worthwhile operational synergies.
It will need more than short-term share price outperformance to sway Rio, said another investor. In their talks in January, the companies differed on the value of Glencore’s undeveloped Argentinian copper assets, he said.
“I don’t see how Rio can change their mind in six months just because coal has gone up and iron ore has gone down.”
(Reporting by Melanie Burton; Editing by Veronica Brown, Praveen Menon and Sonali Paul)
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