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Posted on 25 June 2017, 9:58 AM

Glencore Seeks Rio Tinto's Mines

Other Insights on Related Shares: GLEN.L, RIO.L

In continued negotiations for a deal that would see considerable upheaval in the global mining market, Glencore (GLEN:LN), the biggest coal miner in the Australasian region, has upped the ante in its pursuit of Rio Tinto's (RIO:LN) Hunter Valley mines. The Swiss commodity trading colossus has tabled an offer in the region of $225 million in excess of another offer, by Chinese firm Yanzhou Coal mining, which was already unofficially accepted by Rio Tinto's board. In addition to the raised bid, Glencore offered new incentives, such as a large deposit and hedges against regulatory delays, as well as clarifying issues concerning funding.


Yanzhou Coal mining's offer had almost cleared all regulatory approvals. Glencore has been after Rio Tinto's assets since 2014, when a merger was considered at length before being discarded. The prospect of depletion of its mining pits in the region prompted Glencore to consider the purchase of the mine in the first place.


Rio Tinto will review Glencore's revamped offer early next week, and might reach the conclusion that this offer holds more appeal than Yancoal's bid. In this case it is likely that Yancoal will be given the opportunity to respond with an updated offer of their own, raising the stakes and potentially dragging out the bidding process. Analysts expect the Rio Tinto board will accept the offer. The deal will need to be backed by a majority of shareholders in the subsequent weeks.


Yancoal's offer came as a culmination of a business relationship which has evolved between the two companies for several years, amid a general improvement in the relationship between Rio Tinto and the Chinese authorities (which hold a majority stake in the miner), after a senior Rio executive in its Chinese branch was arrested in 2010 on corruption and espionage charges. Rio Tinto and the state-owned corporation China Minmetals have also recently reached an agreement on future joint exploration projects.


Glencore is in the process of winning regulatory approvals for its bids: it has won approvals from the Australian competition authorities, and is working on countering antitrust concerns in China. Glencore has pledged to pay a deposit of $225 million, redeemable on the condition that the deal wins regulatory approval within an arranged timetable, and has agreed to compensate the Australian miner in case the deal is delayed, either directly through cash flow from the mines once they are taken over or with a $25 million monthly contribution.


The potential profit from the deal is not known, although Glencore management is said to be eyeing the amalgamation of mine output and product marketing, which would result in potential synergies of $1 billion. It is also possible that Glencore could sell stakes in the mines its buying as high as 50%, planning to raise $1.5 billions or more through selling or monetizing assets.


Despite the global slowdown in coal demand and concerns about its future as an economically viable and environmentally sustainable resource, Glencore CEO Ivan Glasenberg, has consistently said that coal is essential for growth in the developing world in the long term, because of surges in energy demand in Asia. Glencore's share price retreated at close of market last Friday by 0.83%, while Rio Tinto's share price was up 0.46%.


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