Glencore PLC Chief Executive Ivan Glasenberg made a personal
approach to Rio Tinto PLC Chairman Jan Du Plessis over the summer
and had a "conceptual" conversation about a possible merger of the
two mining giants, according to a person familiar with the
situation.
The conversation was "sufficiently serious" that Mr. Du Plessis
took it to the Rio board, this person said.
Rio Tinto said it recently rejected a takeover proposal from
Glencore in what could be only the first move in a courtship that
could create the world's biggest mining company by value, which
could draw scrutiny of regulators from China to Australia.
Rio Tinto said earlier Tuesday that a deal with Glencore wasn't
in the best interests of shareholders, and there had been no
contact on the proposal with the commodities producer and trader
since early August after the approach in July.
Investors were questioning if--and if so, when--Glencore might
make another move for Rio. A person close to Glencore refused to
rule out a second approach.
Glencore has been vocal about its desire to expand its reach
through "opportunistic" mergers and acquisitions after it completed
its takeover of Xstrata PLC in May 2013 to create a company worth
US$66 billion at the time. It bought Africa-focused oil producer
Caracal Energy Inc. for US$1.35 billion in April.
Iron ore--which accounts for the majority of Rio Tinto's
earnings--is one of the missing pieces of the puzzle for Glencore,
which produces and sells commodities ranging from copper and zinc
to grains and cotton. "Glencore is in every other commodity market
in a reasonable way, so in that sense it isn't that surprising,"
said Donald Williams, Sydney-based chief investment officer for
Platypus Asset Management.
At the moment, Glencore has only three iron-ore assets, all in
Africa and all at project-stage, so it is not yet producing iron
ore for its traders to sell. Its marketing arm does, however, trade
iron ore from other producers to "a geographically diverse customer
base," it says on its website.
The terms of the initial proposal remain unclear, though.
Without details on Glencore's hopes for the tie-up, it is
impossible to know whether a merger makes commercial sense,
investors say.
Spokesmen for both companies declined to comment on details of
their talks.
"A merger or takeover among large entities like this is
certainly a tricky thing," particularly in terms of ensuring both
shareholders and regulators are satisfied, said Angus Gluskie,
managing director of White Funds Management, which owns Rio Tinto
shares.
Barclays estimated the merged company would have a market value
around US$157 billion.
For now, Rio's top ranks appear to be making it clear they
aren't interested. The company said in a statement it believes
investors are better off under the stewardship of the company's
existing executive team.
"Rio Tinto has made significant progress in refocusing and
strengthening its business," Chairman Jan du Plessis said. "Rio
Tinto's shareholders stand to benefit from the very considerable
value that this will generate."
Still, shares in the company rose 4.3% in Sydney trading.
Iron ore remains highly profitable for miners including Rio
Tinto, which are ramping up production in a bet that their enormous
efficiencies of scale will allow them to profit, even though prices
have fallen sharply since the start of this year.
Glencore would become the world's second-largest iron ore
producer-after Vale SA if it bought Rio Tinto, while potentially
boosting the profitability of the trading business that remains
core to its operations. It could also help get Rio's ore to China
more cheaply by combining the iron-ore miner's extensive network
with Glencore's marketing clout, at a time when rival BHP Billiton
Ltd. has pledged to supplant the Anglo-Australian company as the
world's lowest-cost producer of the raw material.
Glencore Chief Executive Ivan Glasenberg has been critical of
the way iron-ore miners have aggressively expanded their Australian
operations, consciously dragging prices sharply lower. Prices have
fallen by more than 40% this year, to less than US$80 a ton, on
rocketing supply from Australian mines.
It isn't just Rio Tinto's iron ore that Glencore appears to have
its eye on. Glencore earlier this year signaled an interest in a
potential coal-mining joint venture with Rio in Australia's Hunter
Valley, a move Mr. Glasenberg thought could improve the economics
of both their operations at a time when coal prices have been
languishing near multiyear lows.
Glencore says it is dedicated to coal in the long-term and, in
partnership with Sumitomo Corp., has already acquired Rio Tinto's
majority stake in the Clermont coal mine in eastern Australia. It
is the world's largest exporter of thermal coal, used in
electricity generation. Rio remains a major coal producer in volume
terms, though it is now a small contributor to the company's
earnings.
Glencore's proposal is somewhat out of step with its rivals.
Its takeover approach was made at a time when other major
resources companies are moving to simplify their businesses. BHP
Billiton Ltd., currently the world's No. 1 miner by market value,
is planning to spin out unwanted assets including nickel mines and
aluminum smelters so that it can focus on four commodities. That
does, however, include iron ore.
It isn't just in mining that companies are looking to slim down.
Corporate giants across all sectors have been carving off business
units at a near-record pace, according to data provider
Dealogic.
While Mr. Glasenberg has previously assured his own investors he
won't grow "for growth's sake," he's indicated he's keen to sweep
up good assets his rivals no long want, particularly those that can
feed into Glencore's trading arm.
Still, investors and analysts don't think Rio Tinto would go
quietly. The company said Tuesday the approach had been unanimously
rejected by the board and analysts say they think it would take a
substantial offer from Glencore to change their mind.
According to Liberum Capital, Glencore would need to pay a
premium of at least 25% to get a deal across the line.
Some analysts believe a formal bid could face regulatory
concerns in Australia, where Rio Tinto mines most of its iron ore
and has a listing on the country's stock exchange. Australia's
Foreign Investment Review Board will approve deals only if they are
considered to be in the national interest. Chinese authorities may
also raise concerns over its control of mining assets in markets
like copper and coal, they say.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com and Alexis
Flynn at alexis.flynn@wsj.com
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