Rio Tinto And Glencore Have Both Looked Carefully At A Tie-Up That Doesn't Involve A Mega-Merger

Image: Glencore.

One of the big questions in the global resources sector is how Glencore might attempt to take over Rio Tinto in the new year.

Glencore CEO Ivan Glasenberg made an abortive takeover bid for the company in October. Under UK takeover law he can’t have another go until next April and in the meantime there has been much speculation about if, and how, he’ll try again.

If Rio Tinto and Glencore merged they would dethrone BHP as the world’s largest mining company. Rio chief executive Sam Walsh said last week he would be open to “an offer wants to come and make an offer that recognises the true value of assets and recognises that there are synergies that would apply to combining the assets”.

However, Walsh said that Rio and Glencore had different cultures. “We are very long term-focused. Long term in terms of our resource development. Long term in relation to our customer relationships. Those are the things that are very, very important to us. Whereas others are short term in their outlook.”

But there are other options that aren’t quite as drastic as a spectacular merger that would reshape the resources sector. One real option is a joint venture or partnership deal involving both companies’ coal assets in the New South Wales Hunter Valley.

Business Insider understands that in the past there have been a number of conversations between Rio and Glencore about how this might work and detailed analysis has been completed on both sides.

Glencore has openly called for a JV over the Hunter Valley assets in the past and one source close to the operations told Business Insider this could actually be what the miner is after rather than a full blown merger or takeover.

At an investor day in London this week Glasenberg suggested some of the big iron ore miners including Rio, BHP Billion and Vale are squeezing themselves by ramping up production at a time when commodity prices and Chinese demand are falling.

“We don’t want to oversupply and cannibalise our own business. If we do generate cash and we don’t find better ways to deploy it, we are owner-managers and we are happy to pay back some money to ourselves,” he said.

Glencore has decided to shut its coal operations in the Hunter Valley over the Christmas period, a strategy it hopes will help ease oversupply, taking about 5 million tonnes out of the equation.

At the London conference Glencore coal boss Peter Freyberg explained how the company is positioned relative to the rest of the coal industry.

“Some people sitting on perhaps reserves that are apparently higher quality and higher ratio don’t earn the same sorts of margins we do in the pits that we’re operating,” he said.

Freyberg used the below chart to show how Glencore sees itself in comparison to other unnamed majors in the coal sector. The chart shows EBITDA margins for the first half of 2014.

“The comparitors here are major diversifieds and you’ve got to be more than one continent and you’ve got have a mix of thermal coal and coking coal to get onto that graph,” Freyberg said.

“We’ve been aggressive in the way that we’ve managed our business and driven our costs down.”

Overnight Newcastle coal for March was $62.65 a tonne, well below the $80 a tonne mark it was logged at earlier this year.

At another investor presentation in March Glasenberg was asked about a JV between the two companies’ Hunter coal operations. Rio Tinto owns the Mount Thorley Warkworth coal mine which is adjacent to Glencore’s Bulga operations in the area.

“It’s clear, everyone knows it in the Hunter Valley there’s a lot of synergies between us and Rio Tinto in their Hunter Valley assets. There’s a lot to be done. We can get substantial synergies,” he said at the time.

“We’re talking to Rio Tinto but it takes time for both sides to assess each other’s assets. But it’s something we look at. We’ve been talking to them for a long time. How far we’ll get and how soon we can reach an agreement, I don’t know. But it’s something that clearly makes a lot of economic sense.”

Synergies could include workforces, maintenance schedules, transportation or machinery which would ease some of the margin pressure lower commodity prices are inflicting on both companies’ coal operations.

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